EXHIBIT 13.1
Annual Report to Shareholders
(FIRST WEST VIRGINIA BANCORP LETTERHEAD)
P.O. Box 6671
Wheeling, WV 26003
TO OUR SHAREHOLDERS:
I am pleased to report to you the financial performance of First West
Virginia Bancorp, Inc. contained in the 2002 Annual Report. Consolidated net
income for 2002 was $2,673,817 or $1.74 per share, a 10.8% increase over the
$2,412,403 or $1.57 per share reported at December 31, 2001. The Holding Company
ended the year 2002 with total assets of $264,354,184, an increase of 13.9% over
the $232,030,125 reported in 2001. Total stockholders' equity at December 31,
2002 was $22,459,633, an increase of 10.9% over the prior year. The book value
per share was $14.60 at December 31, 2002 as compared to $13.16 a year earlier.
During 2002, the Board of Directors declared and paid cash dividends of
$.69 per share compared to $.68 per share during 2001, which represents an
increase of 1.5% over the prior year.
In our continued commitment to grow and develop new and existing market
areas, Progressive Bank, N.A., a subsidiary bank of First West Virginia Bancorp,
Inc., opened a full-service branch office at 1090 East Bethlehem Boulevard in
Wheeling, West Virginia in the first quarter of 2002. Additionally, Progressive
Bank, N.A. completed its transaction with Wheeling National Bank to purchase its
New Martinsville, West Virginia branch office. Total deposits acquired in the
transaction were approximately $15.7 million and total loans were approximately
$5.1 million. This transaction provides an opportunity for Progressive Bank,
N.A. to expand its customer base and gain new business relationships while
continuing to reinvest in our local communities.
As we continue to grow our subsidiary banks and expand our presence in new
market areas, we also have developed a need for additional office space. During
2002, the Board of Directors approved an expansion and renovation of our
Woodsdale office located at 875 National Road in Wheeling. Construction is
expected to begin in the fall of 2003.
Also on the horizon for 2003, the subsidiary banks will develop a
Progressive Bank, N.A. web site which will include "Internet Banking." In
keeping with the latest innovative technology, our web site will not only offer
online banking services to our customers, but will also provide an opportunity
to market our banks' various products and services to the general public as
well.
February 2002, marked the retirement of Benjamin R. Honecker, director of
First West Virginia Bancorp, Inc. and Progressive Bank, N.A. after thirty years
of service to the Corporation. Mr. Honecker's legal expertise and financial
experience were instrumental in the formation of the Holding Company and its
subsidiary banks. His influence, spirit, and dedication has left its mark on the
Corporation and will continue to do so for many years to come.
The history of First West Virginia Bancorp, Inc. has been built on a
philosophy of safety and soundness, service and commitment to our customers and
strategic growth. Looking forward to the challenges which lie ahead, this
philosophy will lead our community banks into the future.
I want to express my sincere gratitude and appreciation to our officers and
employees who continue to support the vision of our Company and remain such a
vital part of our future plans. I acknowledge our Boards of Directors for their
continued support and direction, and our customers and shareholders for their
continued loyalty. The combination of exceptional people, quality service to our
customers and financial strength prepares us to capitalize on the opportunities
and challenges in the years ahead. As always, your comments and suggestions are
appreciated.
Sincerely,
/s/ Charles K. Graham
--------------------------------------
Charles K. Graham
President and Chief Executive Officer
- --------------------------------------------------------------------------------
Table One
SELECTED FINANCIAL DATA
(In thousands, except per share data)
- --------------------------------------------------------------------------------
First West Virginia Bancorp, Inc.
Years ended December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Total interest income $ 14,309 $ 14,772 $ 14,869 $ 13,207 $ 12,452
Total interest expense 5,101 6,422 7,155 5,602 5,324
Net interest income 9,208 8,350 7,714 7,605 7,128
Provision for loan losses 540 573 436 348 256
Total other income 1,033 942 880 1,073 787
Total other expenses 6,062 5,324 4,816 4,740 4,674
Income before income taxes 3,639 3,395 3,341 3,590 2,985
Net income 2,674 2,412 2,326 2,450 2,033
PER SHARE DATA (1)
Net income $ 1.74 $ 1.57 $ 1.51 $ 1.59 $ 1.32
Cash dividends declared .69 .68 .64 .54 .48
Book value per share 14.60 13.16 11.85 10.44 10.05
AVERAGE BALANCE SHEET SUMMARY
Total loans, net $131,383 $118,224 $112,579 $105,775 $ 99,345
Investment securities 93,962 73,639 69,548 59,716 47,911
Deposits - Interest Bearing 200,170 168,820 155,172 141,768 127,520
Stockholders' equity 20,302 18,902 17,448 16,087 14,697
Total Assets 252,543 217,006 203,529 183,436 164,630
BALANCE SHEET
Investments $108,065 $ 82,202 $ 72,242 $ 59,394 $ 54,080
Loans 136,772 120,944 114,053 110,489 103,555
Other Assets 19,517 28,884 21,598 19,290 13,760
-------- -------- -------- -------- --------
Total Assets $264,354 $232,030 $207,893 $189,173 $171,395
======== ======== ======== ======== ========
Deposits $231,376 $203,772 $173,669 $161,558 $147,785
Federal funds purchased and
Repurchase Agreements 9,038 6,538 14,526 10,274 6,994
Other Liabilities 1,480 1,471 1,473 1,285 1,155
Shareholders' Equity 22,460 20,249 18,225 16,056 15,461
-------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $264,354 $232,030 $207,893 $189,173 $171,395
======== ======== ======== ======== ========
SELECTED RATIOS
Return on average assets 1.06% 1.11% 1.14% 1.34% 1.23%
Return on average equity 13.17% 12.76% 13.33% 15.23% 13.83%
Average equity to average assets 8.04% 8.71% 8.57% 8.77% 8.93%
Dividend payout ratio (1) 39.66% 43.31% 42.38% 33.96% 36.36%
Loan to Deposit ratio 59.11% 59.35% 65.67% 68.39% 70.07%
(1) Adjusted for the 2 percent common stock dividend to stockholders of record
as of December 1, 2000, a 6 for 5 stock split in the effect of a twenty
(20) percent common stock dividend, declared October 12, 1999 to
shareholders of record as of November 1, 1999, and a 4 percent common stock
dividend to stockholders of record as of October 1, 1998.
- --------------------------------------------------------------------------------
2
First West Virginia Bancorp, Inc.
Management's Discussion and Analysis of the Financial Condition and
Results of Holding Company Operations
- --------------------------------------------------------------------------------
First West Virginia Bancorp, Inc., a West Virginia corporation headquartered in
Wheeling, West Virginia commenced operations in July 1973 and has two
wholly-owned subsidiaries: Progressive Bank, N.A., which operates in Wheeling,
Wellsburg, Moundsville, and New Martinsville, West Virginia and Bellaire, Ohio;
and Progressive Bank, N.A.-Buckhannon, which operates in Buckhannon and Weston,
West Virginia. Following is a discussion and analysis of the significant changes
in the financial condition and results of operations of First West Virginia
Bancorp, Inc., (the Holding Company), and its subsidiaries for the years ended
December 31, 2002, 2001 and 2000. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and the Notes, thereto.
OVERVIEW
The Holding Company reported net income of $2,673,817 or $1.74 per share for the
year ended December 31, 2002 as compared to $2,412,403 or $1.57 per share for
the year ended December 31, 2001. The 10.8% increase in earnings during 2002
over 2001 was primarily attributed to increased net interest income and
noninterest income, partially offset by increased operating expenses.
Operational earnings were improved with net interest income increasing $857,951
or 10.3%, to $9,208,095 during 2002 as compared to the same period in 2001. The
increase in net interest income primarily results from a decrease in the average
interest rates paid on interest bearing liabilities.
The return on average assets (ROA), which measures the effectiveness of asset
utilization to produce net income, was 1.06% in 2002 and 1.11% in 2001. The
return on average equity (ROE), which measures the return on the stockholders'
investment, was 13.17% in 2002 and 12.76% in 2001.
During the first quarter of 2002, the Corporation's subsidiary, Progressive
Bank, N.A., opened a full-service office at 1090 East Bethlehem Boulevard in
Wheeling, West Virginia. Additionally, Progressive Bank, N.A. completed its
transaction with Wheeling National Bank to purchase its New Martinsville branch
office. Progressive Bank, N.A. entered into a Purchase and Assumption Agreement
with Wheeling National Bank to purchase the building, loans and deposits of
Wheeling National's New Martinsville, West Virginia branch office located at 631
Third Street. Upon consummation of the transaction the facility was closed and
consolidated with Progressive Bank's existing branch office located at 425 Third
Street, New Martinsville, West Virginia. Total deposits acquired in the
transaction were approximately $15.7 million and total loans were approximately
$5.1 million.
The Holding Company ended the year 2002 with total assets of $264,354,184 an
increase of 13.9% over the $232,030,125 reported for the year ended December 31,
2001. Loans net of reserves increased in 2002 by $15,446,988 to $134,744,855, as
compared to $119,297,867 reported at December 31, 2001. Total deposits increased
in 2002 by $27,603,628, from $203,771,954 at December 31, 2001 to $231,375,582
at December 31, 2002, primarily due to the increase in interest bearing
deposits.
The allowance for loan losses amounted to $2,026,905 at December 31, 2002 or
1.5% of total loans, compared to $1,645,972 or 1.4% of total loans at December
31, 2001. Non-performing assets were $1,682,000 at December 31, 2002, as
compared to $1,317,000 at December 31, 2001.
The Board of Directors declared and paid cash dividends of $.69 per share during
2002 as compared to $.68 in 2001, an increase of 1.5% over the prior year.
Table One is a five-year summary of Selected Financial Data of the Holding
Company. The sections that follow discuss in more detail the information
summarized in Table One. Operational earnings were improved with net interest
income increasing $636,270 or 8.2%, to $8,350,144 during 2001 as compared to the
same period in 2000. The increase in net interest income primarily results from
a decrease in the average interest rates paid on interest bearing liabilities.
EARNINGS ANALYSIS
Net Interest Income
Net interest income, which is the difference between interest earned on loans
and investments and interest paid on deposits and other liabilities, is the
primary source of earnings for the Holding Company. 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. Tables Two and
Three analyze the changes in net interest income for the three years ended
December 31, 2002, 2001, and 2000.
Net interest income was $9,208,095 in 2002, an increase of $857,951 or 10.3%,
from 2001, and follows an increase in 2001 of $636,270 or 8.3% from 2000. The
overall decline in the interest rates paid on interest bearing liabilities has
had a favorable affect on net interest income during 2002 and 2001. The changes
in the volume and mix of earning assets and interest bearing liabilities
combined with the changes in the market rates of interest resulted in taxable
equivalent net interest yields on average earning assets of 4.15% for 2002, as
compared to 4.35% and 4.21% earned during 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
Table Two
Average Balance Sheets and Interest Rate Analysis (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 years ended December 31, 2002,
2001, and 2000. Average balance sheet information as of December 31, 2002, 2001,
and 2000 was compiled using the daily average balance sheet. 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.
December 31, 2002 December 31, 2001 December 31, 2000
----------------------------- ----------------------------- -----------------------------
Average Average Average Average Average Average
Volume Interest Rate Volume Interest Rate Volume Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(expressed in thousands)
ASSETS:
Investment securities:
U.S. Treasury and other U.S.
Government agencies $ 32,533 $ 1,260 3.87% $ 29,143 $ 1,624 5.57% $ 42,503 $ 2,675 6.29%
Mortgage backed securities 37,352 1,718 4.60% 22,952 1,454 6.33% 12,123 778 6.42%
Obligations of states and
political subdivisions 16,676 699 4.19% 15,578 704 4.52% 12,431 576 4.63%
Other securities 7,401 405 5.47% 5,966 353 5.92% 2,491 162 6.50%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Investment securities: 93,962 4,082 4.34% 73,639 4,135 5.62% 69,548 4,191 6.03%
Interest bearing deposits 7,070 113 1.60% 7,869 295 3.75% 6,375 398 6.24%
Federal funds sold 7,227 112 1.55% 6,594 241 3.65% 6,041 380 6.29%
Loans, net of unearned income 131,383 9,969 7.59% 118,224 10,054 8.50% 112,579 9,853 8.75%
Other earning assets 723 33 4.56% 707 47 6.65% 702 47 6.70%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets 240,365 14,309 5.95% 207,033 14,772 7.14% 195,245 14,869 7.62%
Cash and due from banks 5,554 4,811 4,602
Bank premises and equipment 4,242 3,786 2,777
Other assets 4,245 2,893 2,148
Allowance for possible loan losses (1,863) (1,517) (1,243)
-------- -------- --------
Total Assets $252,543 $217,006 $203,529
======== ======== ========
LIABILITIES
Certificates of deposit $ 95,247 $ 3,856 4.05% $ 77,214 $ 4,273 5.53% $ 73,128 $ 4,065 5.56%
Savings deposits 71,989 907 1.26% 64,360 1,579 2.45% 56,940 2,080 3.65%
Interest bearing demand deposits 32,934 205 0.62% 27,246 280 1.03% 25,104 374 1.49%
Federal funds purchased and
Repurchase agreements 8,340 133 1.59% 10,034 290 2.89% 14,067 637 4.53%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing liabilities 208,510 5,101 2.45% 178,854 6,422 3.59% 169,239 7,156 4.23%
Demand deposits 22,136 17,844 15,301
Other liabilities 1,595 1,406 1,541
-------- -------- --------
Total Liabilities 232,241 198,104 186,081
STOCKHOLDERS' EQUITY 20,302 18,902 17,448
-------- -------- --------
Total Liabilities
and Stockholders' Equity $252,543 $217,006 $203,529
======== ======== ========
Net yield on earning assets $ 9,208 3.83% $ 8,350 4.03% $ 7,713 3.95%
======= ==== ======= ==== ======= ====
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 2002, 2001, and 2000, respectively.
The effect of this adjustment is presented below (in thousands).
Investment securities $ 93,962 $ 4,503 4.79% $ 73,639 $ 4,550 6.18% $ 69,548 $ 4,540 6.53%
Loans 131,383 10,327 7.86% 118,224 10,301 8.71% 112,579 10,012 8.89%
======== ======= ==== ======== ======= ==== ======== ======= ====
Total earning assets $240,365 $15,088 6.28% $207,033 $15,434 7.45% $195,245 $15,377 7.88%
======== ======= ==== ======== ======= ==== ======== ======= ====
Taxable equivalent net yield on
earning assets $ 9,987 4.15% $ 9,012 4.35% $ 8,221 4.21%
======= ==== ======= ==== ======= ====
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
Table Three
Rate Volume Analysis of Changes in Interest Income and Expense
(in thousands)
The effect on interest income and interest expense for the years ended December
31, 2002 and 2001 due to changes in average volume and rate from the prior year,
is presented below. The effect of a change in average volume has been determined
by applying the average rate to the change in volume. The change in rate has
been determined by applying the average volume in the earlier year by the change
in rate. The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in each.
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
------------------------------ -------------------------------
Net Net
Average Increase Average increase
Volume Rate (decrease) Volume Rate (decrease)
------- ------- ---------- ------- -------- ----------
(expressed in thousands)
INTEREST INCOME FROM:
- ---------------------
U.S. Treasury and other U.S.
Government agencies $ 189 $ (553) $ (364) $(841) $ (210) $(1,051)
Mortgage backed securities 912 (648) 264 695 (19) 676
Obligations of states and
political subdivisions 50 (55) (5) 146 (18) 128
Other securities 86 (34) 52 226 (35) 191
------ ------- ------- ----- ------- -------
Total investment securities 1,237 (1,290) (53) 226 (282) (56)
Interest bearing deposits (30) (152) (182) 93 (196) (103)
Federal funds sold 23 (152) (129) 35 (174) (139)
Loans, net of unearned income 1,119 (1,204) (85) 494 (293) 201
Other earning assets -- (14) (14) -- -- --
------ ------- ------- ----- ------- -------
Total interest earned 2,349 (2,812) (463) 848 (945) (97)
------ ------- ------- ----- ------- -------
INTEREST EXPENSE ON:
- --------------------
Time deposits 998 (1,415) (417) 227 (19) 208
Savings deposits 187 (860) (673) 271 (772) (501)
Interest bearing demand deposits 58 (133) (75) 32 (126) (94)
Federal funds purchased
and Repurchase agreements (49) (108) (157) (183) (164) (347)
------ ------- ------- ----- ------- -------
Total interest paid 1,194 (2,516) (1,322) 347 (1,081) (734)
------ ------- ------- ----- ------- -------
Net interest differential $1,155 $ (296) $ 859 $ 501 $ 136 $ 637
====== ======= ======= ===== ======= =======
Presented below is the effect on volume and rate variances of the adjustment of
interest income on obligations of states and political subdivisions to the fully
taxable equivalent basis using a combined Federal and State corporate income tax
rate of 40% for the years ended 2002, 2001, and 2000, respectively.
Investment securities $1,256 $(1,303) $ (47) $267 $(257) $ 10
Loans 1,147 (1,121) 26 502 (213) 289
====== ======= ====== ==== ===== ====
Total interest earned $2,396 $(2,742) $(346) $897 $(840) $ 57
====== ======= ====== ==== ===== ====
Net interest differential $1,202 $ (226) $ 976 $550 $ 241 $791
====== ======= ====== ==== ===== ====
- --------------------------------------------------------------------------------
5
Net Interest Income Continued
Interest income on investment securities during 2002 decreased $39,422 or 1.0%
over 2001, and follows a decrease of $58,361 or 1.4% over 2000. The decline in
the average yields earned on investment securities which were partially offset
by average volume increases primarily contributed to the decreased interest
income earned on investment securities in 2002 and 2001. The taxable equivalent
yield on investment securities fell 1.39%, from 6.18% in 2001 to 4.79% in 2002
and .35%, from 6.53% in 2000 to 6.18% in 2001. The average volume of investment
securities increased $20,323,000 or 27.6% in 2002 as compared to 2001, and
increased $4,091,000 or 5.9% in 2001 as compared to 2000.
Interest and fees on loans decreased $85,209 or .9% from 2001 to 2002, after
increasing $201,215 or 2.0% from 2000 to 2001. Interest and fees on loans
declined in 2002 as compared to 2001 primarily due to the decrease in the yield
earned on the loan portfolio offset in part by the increase in the average
volume of loans. The taxable equivalent yield on loans continued to decline,
decreasing from 8.89% in 2000 to 8.71% in 2001 to 7.86% in 2002. The increase in
interest income on loans during 2001 as compared to 2000 resulted primarily from
an increase in the average loan volume. The average loan volume increased
$13,159,000 or 11.1% in 2002 as compared to 2001 and $5,645,000 or 5.0% in 2001
as compared to 2000.
Interest expense in 2002 decreased $1,321,577 or 20.6% from 2001, compared to a
decrease in 2001 of $733,460 or 10.3% from 2000. The decrease in the interest
rates paid on interest bearing liabilities, which were partially offset by an
increase in the average volume of interest bearing liabilities primarily
resulted in the decline in interest expense during 2002 and 2001. The average
yield paid on interest bearing liabilities during 2002 decreased 1.14%, from
3.59% in 2001 to 2.45% in 2002, and follows a decrease in 2001 of .64%, from
4.23% in 2000 to 3.59% in 2001. The decline in the average yields paid on time
deposits, savings deposits and repurchase agreements from the previous year
primarily contributed to the reduced interest expense in 2002. During 2001,
prior year decreases in the average yield paid on savings deposits, interest
bearing demand deposits and repurchase agreements primarily contributed to the
reduction in interest expense. The average volume of interest bearing deposits
increased $31,350,000 or 18.6% in 2002 compared to 2001, and increased
$13,648,000 or 8.8% in 2001 as compared to 2000. Increases in the average volume
of interest bearing deposits during 2002 and 2001 were primarily the result of
the growth in time deposits and savings deposits.
Noninterest Income
Service charges and other fees represent the major component of noninterest
income. These charges are earned from assessments made on checking and savings
accounts. Service charges increased $85,014 in 2002, up 14.3%, from 2001, as
compared to an increase of 11.3% from 2000 to 2001. The increases in service
charges in both 2002 and 2001 were primarily due to the increase in the number
of charges assessed on deposit accounts.
Sales of investment securities by the subsidiary banks are generally limited to
the needs established under the liquidity policies. During 2002, the subsidiary
banks accounted for securities gains of $28,341 and securities losses of $16,075
which were attributable to sales of securities available for sale. Additionally,
the Holding Company accounted for securities gains of $2,362 and securities
losses of $8,403 which were attributable to sales of marketable equity
securities. During 2001, the subsidiary banks accounted for securities gains of
$7,867 and securities losses of $9,133 which were sales of securities available
for sale. The Holding Company also recorded securities gains of $21,018 and
securities losses of $11,859 which were sales of marketable equity securities in
2001. In 2000, the Holding Company recorded securities gains of $37,944 and
securities losses of $14,508 which were attributable to sales of marketable
equity securities.
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. In 2002, other operating income was
$345,980, an increase of $7,642 or 2.3% over 2001, and follows an increase of
$17,064, or 5.3%, over 2000. ATM charges and card fees primarily contributed to
the increase in other operating income in 2002 and 2001.
Non-Interest Expense
Salary and employee benefits represent the largest component of noninterest
expense. Salary and employee benefits increased $387,677 or 14.2% in 2002 as
compared to the same period in 2001. The increase in salary and employee
benefits in 2002 was primarily due to the hiring of additional personnel at the
subsidiary bank's branch offices and normal annual merit adjustments. During
2001, salary and employee benefits increased $186,833 or 7.4% over 2000. The
increase in salary and employee benefits in 2001 was primarily due to the hiring
of additional personnel and normal annual merit adjustments.
Occupancy expenses increased $151,437 or 18.2% in 2002 over 2001, following an
increase of $58,559 or 7.6% in 2001 over 2000. During 2002, occupancy expenses
primarily rose as a result of additional overhead expenses with the opening of a
branch office in Wheeling, WV. Occupancy expense increased during 2001 primarily
due to increased overhead expenses with the opening of the subsidiary bank's
Moundsville and New Martinsville, West Virginia branch offices and other real
estate expenses.
- --------------------------------------------------------------------------------
6
Non-Interest Expense Continued
The major components of other operating expenses include: stationery and
supplies, directors' fees, service expense, postage and transportation, other
taxes, advertising, and regulatory assessments and deposit insurance. Other
operating expenses increased $198,444 or 11.2% in 2002 over 2001 after
increasing $262,763 or 17.5% in 2001 over 2000. During 2002, the increase in
other operating expenses was primarily due to the increase in postage and
transportation expense, advertising expense, regulatory assessments, stationery
and supplies expense, other taxes and other expenses partially offset by the
decrease in directors fees. The increase in other operating expenses during 2001
was primarily due to the increase in other expenses, other taxes, service
expense, stationery and supplies expense and postage and transportation expense.
Income Taxes
Income tax expense for the period ended December 31, 2002 was $965,250, a
decrease of $17,033 over 2001 as compared to the decrease of $33,000 from 2000
to 2001. The increase in tax exempt income in 2002 over 2001 primarily
contributed to the reduction in income tax expense in 2002. Components of the
income tax expense for December 31, 2002 were $786,371 for federal taxes and
$178,879 for West Virginia corporate net income taxes.
For federal income tax purposes, tax-exempt income is based on qualified state,
county, and municipal bonds and loans. Tax-exempt income was $1,169,054 in 2002;
$992,879 in 2001; and $761,883 in 2000. The state of West Virginia recognizes
tax-exempt income based on the average of certain investments and loans held
during the tax reporting period. Nontaxable items included are federal
obligations and securities, obligations of West Virginia and West Virginia
political subdivisions, investments of loans primarily secured by liens or
security agreements on residential property and other real estate in the form of
a mobile home, modular home or double-wide located in West Virginia. Nontaxable
West Virginia income attributable to the foregoing items was approximately
$1,576,000 in 2002; $1,405,000 in 2001; and $1,631,000 in 2000.
Federal income tax rates and West Virginia corporate net income tax rates were
consistent at 34% and 9%, respectively, for the years ended December 31, 2002,
2001 and 2000. Additional information regarding income taxes is contained in
Note 7 to the Consolidated financial statements.
Balance Sheet Analysis
Investments
Investment securities increased $25,862,948 or 31.5% from 2001, and followed an
increase in 2001 of $9,959,980 or 13.8% from 2000. The increases in investment
securities at December 31, 2002 and 2001 were primarily the result of increased
deposit growth.
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. Treasury securities, U.S. Government agency and
corporation securities, obligations of states and political subdivisions,
corporate debt securities, mortgage-backed securities and equity securities.
Taxable securities comprised 83.4% of total securities at December 31, 2002, as
compared to 81.0% at December 31, 2001. Other than the normal risks inherent in
purchasing U.S. Treasury securities, U.S. Government agency and corporation
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 Holding 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 market 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 market value increased $27,028,869 or 36.9% from 2001, and
represented 93% of the investment portfolio at December 31, 2002. The increase
in the available for sale securities was primarily due to the purchase of
mortgage backed securities. Investment securities held to maturity are
securities purchased with the intent and ability to hold until their maturity.
Securities classified as held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. The held to maturity
securities decreased $1,165,921 or 13.2% from 2001 and represented 7% of the
investment portfolio as of December 31, 2002. The decrease in the held to
maturity securities was primarily the result of maturities and calls of tax
exempt municipal securities which were reinvested in available for sale
securities.
7
- --------------------------------------------------------------------------------
Table Four
Investment Portfolio
(in thousands)
The maturity distribution using book value including accretion of discounts and
amortization of premiums (expressed in thousands) and approximate yield of
investment securities at December 31, 2002 and December 31, 2001 are presented
in the following table. Tax equivalent yield basis was used on tax exempt
obligations. Approximate yield was calculated using a weighted average of yield
to maturities.
December 31, 2002 December 31, 2001
------------------------------------- -------------------------------------
Securities Securities Securities Securities
Held to Maturity Available for Sale Held to Maturity Available for Sale
---------------- ------------------ ---------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- -------- ----- ------- ----- ------- -----
U.S. Treasury and other U.S.
Government Agencies
Within One Year $ -- --% $ 10,220 3.36% $ -- --% $12,264 2.89%
After One But
Within Five Years -- -- 22,318 3.58 -- -- 15,284 4.38
After Five But
Within Ten Years -- -- 5,482 3.09 -- -- 2,521 6.43
After Ten Years -- -- 433 2.37 -- -- 1,284 3.03
------ ---- -------- ---- ------ ---- ------- ----
-- -- 38,453 3.44 -- -- 31,353 3.91
States & Political Subdivisions
Within One Year 265 5.55 3,154 3.76 960 6.46 1,499 4.65
After One But
Within Five Years 4,063 6.12 4,221 4.56 4,043 6.21 4,914 5.43
After Five But
Within Ten Years 2,874 6.66 2,749 5.30 3,851 6.65 1,260 6.30
After Ten Years 486 4.52 1,505 4.57 -- -- 244 6.66
------ ---- -------- ---- ------ ---- ------- ----
7,688 6.20 11,629 4.52 8,854 6.43 7,917 5.46
Corporate Debt Securities
Within One Year -- -- 519 4.56 -- -- 1,251 2.85
After One But
Within Five Years -- -- 4,512 5.35 -- -- 5,871 5.49
After Five But
Within Ten Years -- -- 1,744 6.01 -- -- 964 7.05
------ ---- -------- ---- ------ ---- ------- ----
-- -- 6,775 5.46 -- -- 8,086 5.27
Mortgage-Backed Securities -- -- 43,064 4.46 -- -- 25,535 5.75
Equity Securities -- -- 456 2.39 -- -- 457 2.67
------ ---- -------- ---- ------ ---- ------- ----
Total $7,688 6.20% $100,377 4.13% $8,854 6.43% $73,348 4.86%
====== ==== ======== ==== ====== ==== ======= ====
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
Investments Continued
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 under the
requirements of FAS 115 and represent temporary adjustments in value. The
carrying values of securities available for sale were increased by $1,943,664
and $989,018 at December 31, 2002 and 2001, respectively. The market value of
securities classified as held to maturity was above book value by $281,399 and
by $158,100 at December 31, 2002 and 2001, respectively.
Loans
Total loans, net of unearned income, increased $15,827, 921 or 13.1% from
$120,943,839 at December 31, 2001 to $136,771,760 at December 31, 2002.
Approximately $5.1 million or 4.2% of the increase in loans during 2002
primarily was due to the acquisition of the loans of Wheeling National Bank's
New Martinsville branch office by the subsidiary bank. Increases of $8,606,000
in commercial loans, $6,238,000 in real estate loans and $2,862,000 in other
loans, offset by a decrease of $1,883,000 in installment loans contributed to
the growth in the loan portfolio from 2001 to 2002. The loan growth during 2001
was primarily due to increases in commercial loans and other loans which
increased approximately $6,178,000 and $3,145,000, respectively offset by a
decrease in installment loans of $4,379,000. Commercial loans increased during
2001, primarily in commercial real estate loans, due to refinances by new and
existing customers. Other loans also increased during 2001, primarily in non
rated industrial development obligations.
Real estate residential loans which include real estate construction, real
estate farmland, and real estate residential loans comprised thirty-seven
percent (37%) of the loan portfolio. Commercial loans which include real estate
secured by non-farm, non-residential and commercial and industrial loans
comprised forty-two percent (42%) of the loan portfolio. Installment loans
comprised thirteen percent (13%) of the loan portfolio. Other loans which
include non-rated industrial development obligations, direct financing leases
and other loans comprised eight percent (8%) of the loan portfolio. The changes
in the composition of the loan portfolio from 2001 to 2002 were a 2% increase in
commercial loans, a 1% increase in other loans and a 3% decrease in installment
loans. From 2000 to 2001, the changes in the composition of the loan portfolio
were a 3% increase in other loans, a 3% increase in commercial loans, a 1%
decrease in real estate residential loans and a 5% decrease in installment
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
five-year summary of nonperforming assets is presented in Table Six.
Total non-performing loans were $1,682,000 at December 31, 2002 as compared with
$1,317,000 at December 31, 2001. Non-performing loans increased $365,000 in
2002, as compared to the decrease of $966,000 in 2001. The increase in non
performing loans in 2002 was primarily due to an increase in non-accrual loans.
Non-performing loans decreased in 2001 primarily due to a decline in loans 90
days past due or more. Non-accrual loans were $1,567,000 or 1.1% of total loans
outstanding as of December 31, 2002, as compared to $1,184,000 or 1.0% at
December 31, 2001. The non-accrual loans in 2002 and 2001 primarily were
commercial loans which are secured by properties believed to have adequate
values to cover the outstanding loan balances. Loans past due 90 days or more
were $76,000 or .1% of total loans outstanding at December 31, 2002, as compared
to $73,000 or .1% at December 31, 2001. There were no loans classified as
renegotiated at December 31, 2002 and 2001. Other real estate amounted to
$39,000 at December 31, 2002. Other real estate owned decreased $21,000 in 2002
over 2001 due to the sale of the properties by the subsidiary banks. Management
continues to monitor the nonperforming assets to ensure against deterioration in
collateral values.
Allowance for Loan Losses
The corporation maintains an allowance for loan losses to absorb probable loan
losses. Table Seven presents a five-year summary of the Allowance for Loan
Losses.
The Corporation has historically maintained the allowance for loan losses at a
level greater than actual charge-offs. In determining the allocation of the
allowance for possible loan losses, charge-offs for 2003 are anticipated to be
within the historical ranges. Although a subjective evaluation is determined by
management, the corporation 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 corporation's market area could result in new
estimates which could affect the corporation'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.
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
Table Five
Loan Portfolio - Maturities and sensitivities of Loans to Changes in Interest
Rates
The following table presents the contractual maturities of loans other than
installment loans and residential mortgages for all banks as of December 31,
2002 and December 31, 2001 (in thousands):
December 31, 2002
----------------------------------------
After one
In one Year Through After
Year or Less Five Years Five Years
------------ ------------ ----------
Real Estate - construction $ 430 $ 20 $ 378
Commercial real estate - secured by
nonfarm, nonresidential property 826 2,741 35,460
Commercial and industrial 1,800 8,721 7,472
Nonrated industrial development obligations 998 3,087 6,698
------ ------- -------
Total $4,054 $14,569 $50,008
====== ======= =======
December 31, 2001
----------------------------------------
After one
In one Year Through After
Year or Less Five Years Five Years
------------ ------------ ----------
Real Estate - construction $ 165 $ 6 $ 224
Commercial real estate - secured by
nonfarm, nonresidential property 947 2,870 30,708
Commercial and industrial 966 6,465 6,458
Nonrated industrial development obligations 813 1,824 5,147
------ ------- -------
Total $2,891 $11,165 $42,537
====== ======= =======
The following table presents an analysis of fixed and variable rate loans as of
December 31, 2002 and December 31, 2001 along with the contractual maturities of
loans other than installment loans and residential mortgages (in thousands):
December 31, 2002
----------------------------------------
After one
In one Year Through After
Year or Less Five Years Five Years
------------ ------------ ----------
Fixed Rates $2,827 $ 8,714 $12,208
Variable Rates 1,227 5,855 37,800
------ ------- -------
Total $4,054 $14,569 $50,008
====== ======= =======
December 31, 2001
----------------------------------------
After one
In one Year Through After
Year or Less Five Years Five Years
------------ ------------ ----------
Fixed Rates $2,855 $ 6,779 $ 9,918
Variable Rates 36 4,386 32,619
------ ------- -------
Total $2,891 $11,165 $42,537
====== ======= =======
- --------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
Table Six
Risk Elements
Loans which are in the process of collection, but are contractually past due 90
days or more as to interest or principal, renegotiated, non-accrual loans and
other real estate are as follows ( in thousands):
December 31,
--------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ---- ----
Past Due 90 Days or More:
Real Estate - residential $ 61 $ 21 $ 48 $ 66 $ 76
Commercial -- 26 711 11 4
Installment 15 26 145 242 188
------ ------ ------ ---- ----
$ 76 $ 73 $ 904 $319 $268
------ ------ ------ ---- ----
Non-accrual:
Real Estate - residential $ 115 $ 27 $ 14 $ 17 $106
Commercial 1,443 1,124 1,202 440 184
Installment 9 33 32 116 106
------ ------ ------ ---- ----
$1,567 $1,184 $1,248 $573 $396
------ ------ ------ ---- ----
Other Real Estate $ 39 $ 60 $ 131 $ -- $ --
------ ------ ------ ---- ----
Total non-performing assets $1,682 $1,317 $2,283 $892 $664
====== ====== ====== ==== ====
Total non-performing assets
to total loans and
other real estate 1.23% 1.09% 2.00% 0.81% 0.64%
Generally, all Banks recognize interest income on the accrual basis, except for
certain loans which are placed on a non-accrual status. Loans are placed on a
non-accrual status, when in the opinion of management doubt exists as to its
collectibility. In accordance with the Office of the Comptroller of the Currency
Policy, banks may not accrue interest on any loan which either the principal or
interest is past due 90 days or more unless the loan is both well secured and in
the process of collection.
The amount of interest income that would have been recognized had the loans
performed in accordance with their original terms was $97,400 and $96,600 for
the periods ended December 31, 2002 and 2001, respectively.
As of December 31, 2002, there are no loans known to management other than those
previously disclosed about which management has any information about possible
credit problems of borrowers which causes management to have serious doubts as
to the borrower's ability to comply with present loan repayment terms.
- --------------------------------------------------------------------------------
11
- --------------------------------------------------------------------------------
Allowance for Loan Losses Continued
The allowance for loan losses increased $380,933 or 23.1%, from $1,645,972 at
December 31, 2001 to $2,026,905 at December 31, 2002. The allowance for loan
losses represented 1.5% and 1.4% of outstanding loans as of December 31, 2002
and 2001, respectively. Net loan charge-offs were $159,067 in 2002, compared to
$229,072 in 2001 and $282,176 in 2000. The net loan charge-offs in 2002, 2001
and 2000 were primarily installment and commercial loans. The provision for
possible loan losses was $540,000 for the year ended December 31, 2002, compared
to $573,000, and $436,500 at December 31, 2001 and 2000, respectively. The
credit quality of the loan portfolio combined with the recent level of net
charge-offs and nonperforming assets continue to be considered in calculation of
the provision for loan losses.
The corporation 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
experience as presented in Table Eight.
Deposits
A stable core deposit base is the major source of funds for the Holding Company
subsidiaries. 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 corporation's need for certain
types of deposit growth. Total deposits were $231,375,582 at December 31, 2002
as compared to $203,771,954 at December 31, 2001, an increase of 13.6%, and
follows an increase of 17.3% between 2001 and 2000. Approximately $15.7 million
or 7.7% of the increase in deposits during 2002 primarily was due to the
acquisition of the deposits of Wheeling National Bank's New Martinsville branch
office by the subsidiary bank. In 2001, approximately $9.6 million or 5.5% of
the increase in deposits primarily was due to the acquisition of the deposits of
United National Bank's New Martinsville branch office by the subsidiary bank.
The deposit growth in 2002 was primarily in savings and time deposits. The
growth in total deposits during 2001 was primarily in interest bearing deposits.
Time deposits grew by $15,308,138 or 18.7% in 2002, and follows an increase of
$8,747,165 or 12.0% in 2001. The increase in time deposits in 2002 and 2001 was
primarily the result of the subsidiary bank's purchase of deposits combined with
the special promotions offered by the subsidiary banks. Time deposits over
$100,000 increased $3,675,000, from $21,586,000 at December 31, 2001 to
$25,261,000 at December 31, 2002. Savings deposits increased by $8,725,616 or
12.6% during 2002, and follows an increase of $9,601,429 or 16.0% in 2001. In
2002 the increase in savings deposits was primarily due to the demand for the
Super Saver savings deposit product which was introduced in 2002. The increase
in savings deposits during 2001 was mainly due to the demand for the Progressive
Gold money market product by depositors. Interest bearing demand deposits
increased $2,954,006 or 9.4% in 2002 and follows an increase of $7,397,398 or
30.8% in 2001. At December 31, 2002, noninterest bearing deposits comprised 9%
of total deposits and interest bearing deposits which include NOW, money market,
savings and time deposits comprised 91% of total deposits. The change in the
deposit mix from December 31, 2001 to December 31, 2002 was a 1% increase in
interest bearing deposits and a 1% decrease in noninterest bearing deposits.
Federal Funds Purchased and Repurchase Agreements
Federal funds purchased and repurchase agreements are short-term borrowings.
Repurchase agreements increased $2,500,154 or 38.2%, from $6,537,648 at December
31, 2001 to $9,037,802 at December 31, 2002. There were no Federal funds
purchased as of December 31, 2002 and 2001.
Capital Resources
A strong capital base is vital to continued profitability because it promotes
depositor and investor confidence and provides a solid foundation for future
growth. Stockholders' equity increased 8.0% in 2002 entirely from current
earnings after quarterly dividends, and an increase of 2.9% resulting from the
effect of the change in the net unrealized gain on securities available for
sale. The increase in stockholders' equity in 2002 follows an increase of 7.5%
in 2001 entirely from current earnings after quarterly dividends, and an
increase of 3.6% resulting from the effect of the change in the net unrealized
gain on securities available for sale. Stockholders' equity amounted to 8.5% and
8.7% of total assets at the end of 2002 and 2001, respectively.
The Holding Company's primary source of funds for payment of dividends to
shareholders is from the dividends from its subsidiary banks. Earnings from
subsidiary bank operations are expected to remain adequate to fund payment of
stockholders' dividends and internal growth. In management's opinion, the
subsidiary banks have the capability to upstream sufficient dividends to meet
the cash requirements of the Holding Company. Additional information concerning
the payment of dividends by the Holding Company is discussed in Note 16 of the
Consolidated Financial Statements.
The Holding Company is subject to regulatory risk-based capital guidelines
administered by the Federal Reserve Board. These risk-based capital guidelines
establish minimum capital ratios of Total capital, Tier 1 Capital, and Leverage
to assess the capital adequacy of bank holding companies. Additional information
on capital amounts, ratios and minimum regulatory requirements can be found in
Note 17 of the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
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 (in thousands).
Summary of Loan Loss Experience
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
Balance at Beginning of period
Allowance for Possible
Loan Losses $ 1,646 $ 1,302 $ 1,148 $ 1,123 $ 1,218
Loans Charged Off:
Real Estate - residential 2 -- 20 14 65
Commercial 134 95 107 16 134
Installment 63 164 189 315 173
-------- -------- -------- -------- -------
199 259 316 345 372
Recoveries:
Real Estate - residential -- 4 -- -- 5
Commercial 29 12 5 -- --
Installment 11 14 29 22 16
-------- -------- -------- -------- -------
40 30 34 22 21
Net Charge-offs 159 229 282 323 351
Additions Charged to Operations 540 573 436 348 256
-------- -------- -------- -------- -------
Balance at end of period: $ 2,027 $ 1,646 $ 1,302 $ 1,148 $ 1,123
======== ======== ======== ======== =======
Average Loans Outstanding $131,383 $118,224 $112,579 $105,775 $99,345
======== ======== ======== ======== =======
Ratio of net charge-offs
to Average loans
outstanding for the period 0.12% 0.19% 0.25% 0.31% 0.35%
Ratio of the Allowance for Loan
Losses to Loans Outstanding for
the period 1.48% 1.36% 1.14% 1.04% 1.08%
The additions 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.
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
Table Eight
Loan Portfolio - Allocation of allowance for possible loan losses
The following table presents an allocation of the allowance for possible loan
losses at each of the five year periods ended December 31, 2002 ( expressed in
thousands). 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.
December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
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
Amount loans Amount loans Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Real estate -
residential $ 276 37.5% $ 263 37.3% $ 241 37.9% $ 238 36.2% $ 208 34.2%
Commercial 1,161 41.7 821 40.0 549 37.0 490 38.7 490 37.8
Installment 569 12.9 541 16.1 492 20.9 400 22.2 374 23.8
Others 21 7.9 21 6.6 20 4.2 20 2.9 20 4.2
Unallocated -- -- -- -- -- -- -- -- 31 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,027 100.0% $1,646 100.0% $1,302 100.0% $1,148 100.0% $1,123 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- --------------------------------------------------------------------------------
14
Interest Rate Risk
Changes in interest rates can affect the level of income of a financial
institution depending on the repricing characteristics of its assets and
liabilities. This is termed interest rate risk. If a financial institution is
asset sensitive, more of its assets will reprice in a given time frame than
liabilities. This is a favorable position in a rising rate environment and would
enhance income. If an institution is liability sensitive, more of its
liabilities will reprice in a given time frame than assets. This is a favorable
position in a falling rate environment. Financial institutions allocate
significant time and resources to managing interest rate risk because of the
impact that changes in interest rates can have to earnings.
The initial step in the process of maintaining a corporation's interest rate
sensitivity involves the preparation of a basic "gap" analysis of earning assets
and interest bearing liabilities as reflected in the following table. The
analysis measures the difference or the "gap" between the amount of assets and
liabilities repricing within a given time period. This information is used to
manage a corporation's asset and liability positions. Management uses this
information as a factor in decisions made about maturities of investment of cash
flows, classification of investment securities purchases as available-for-sale
or held-to-maturity, emphasis of variable rate or fixed rate loans and short or
longer term deposit products in marketing campaigns, and deposit account pricing
to alter asset and liability repricing characteristics. The overall objective is
to minimize the impact to the margin of any significant change in interest
rates.
The information presented in the following Interest Rate Risk table contains
assumptions and estimates used by management in determining repricing
characteristics and maturity distributions. As noted in the following table, the
cumulative gap at one year is approximately $37,138,000, which indicates the
corporation's earning assets are more than interest bearing liabilities at
December 31, 2002. As the table presented is as of a point in time and
conditions change on a daily basis, any conclusions made may not be indicative
of future results.
Interest Rate Risk Table - December 31, 2002
(less (greater Non-
than) 3 4 - 12 1 - 3 than) 3 Interest
Months Months Years Years Bearing Total
------- ------- ------- -------- -------- --------
ASSETS:
Federal funds sold $ 6,403 $ $ $ $ $ 6,403
Investment securities 24,579 36,672 29,983 14,818 2,013 108,065
Loans 28,376 41,586 41,039 24,318 1,453 136,772
Other assets 66 50 15,025 15,141
Allowance for loan losses (2,027) (2,027)
------- ------- ------- ------- -------- --------
Total assets $59,424 $78,258 $71,022 $39,186 $ 16,464 $264,354
======= ======= ======= ======= ======== ========
LIABILITIES AND CAPITAL
NOW and savings $17,719 $ 5,113 $ 6,868 $53,950 $ $ 83,650
MMDA's 29,028 29,028
Certificates of deposit * $100,000 10,342 20,483 25,321 15,799 71,945
Certificates of deposit **$100,000 2,468 6,354 11,378 5,061 25,261
Noni terest bearing demand deposits 21,492 21,492
Other liabilities 1,481 1,481
Repurchase agreements 8,849 188 9,037
Stockholders' equity 22,460 22,460
------- ------- ------- ------- -------- --------
Total liabilities and capital $68,406 $32,138 $43,567 $74,810 $ 45,433 $264,354
======= ======= ======= ======= ======== ========
GAP (8,982) 46,120 27,455 (35,624) (28,969)
GAP/ Total Assets (3.40%) 17.45% 10.39% (13.48%) (10.96%)
Cumulative GAP (8,982) 37,138 64,593 28,969 0
Cumulative GAP/Total Assets (3.40%) 14.05% 24.43% 10.96% 0.00%
The above analysis contains repricing and maturity assumptions and estimates
used by management.
- --------------------------------------------------------------------------------
*= less than
**=greater than
15
Interest Rate Risk Continued
The Company's subsidiary banks use an asset/liability model to measure the
impact of changes in interest rates on net interest income on a periodic basis.
Assumptions are made to simulate the impact of future changes in interest rates
and/or changes in balance sheet composition. The effect of changes in future
interest rates on the mix of assets and liabilities may cause actual results to
differ from simulated results. Guidelines established by the Company's
subsidiary banks provide that the estimated net interest income may not change
by more than 10% in a one year period given a +/- 200 basis point parallel shift
in interest rates. Excluding the potential effect of interest rate changes on
assets and liabilities of the Holding Company which are not deemed material, the
anticipated impact on net interest income of the subsidiary banks at December
31, 2002 were as follows: given a 200 basis point increase scenario net interest
income would not be increased minimally, and given a 200 basis point decrease
scenario net interest income would be reduced by approximately 8.1%. Under both
interest rate scenarios the subsidiary banks were within the established
guideline.
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 Holding Company had
investment securities with an estimated market value of $100,377,179 classified
as available for sale at December 31, 2002. These securities are available for
sale at any time based upon management's assessment in order to provide
necessary liquidity should the need arise. In addition, the Holding Company's
subsidiary banks, Progressive Bank, N.A., and Progressive Bank, N.A.-
Buckhannon, are members of the Federal Home Loan Bank of Pittsburgh (FHLB).
Membership in the FHLB provides an additional source of short-term and long-term
funding, in the form of collateralized advances. At December 31, 2002, the
subsidiary banks had unused lines of credit available with the FHLB in the
aggregate amount of approximately $7 million. There were no borrowings
outstanding pursuant to these agreements as of December 31, 2002.
At December 31, 2002 and December 31, 2001, the Holding Company had outstanding
loan commitments and unused lines of credit totaling $15,750,000 and
$19,511,000, respectively. As of December 31, 2002, management placed a high
probability for required funding within one year of approximately $11,436,000.
Approximately $3,773,000 is principally unused home equity and credit card lines
on which management places a low probability for required funding.
Market Information of Common Stock
First West Virginia Bancorp, Inc's common stock has been traded on the American
Stock Exchange primary list since June 20, 1995, and began trading under the
symbol of FWV. The following table sets forth the high and low sales prices of
the common stock during the respective quarters.
Stock Prices
---------------
Low High
------ ------
2002
4th Quarter $16.65 $21.15
3rd Quarter $17.39 $19.40
2nd Quarter $18.00 $19.85
1st Quarter $18.50 $20.00
2001
4th Quarter $15.15 $18.85
3rd Quarter $15.00 $17.85
2nd Quarter $13.25 $15.70
1st Quarter $12.60 $14.38
- --------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
First West Virginia Bancorp, Inc.
Summarized Quarterly Financial Information
- --------------------------------------------------------------------------------
A summary of selected quarterly financial information follows:
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
---- ---------- ---------- ---------- ----------
Total interest income $3,442,323 $3,659,721 $3,633,724 $3,572,817
Total interest expense 1,273,474 1,300,488 1,298,615 1,227,913
Net interest income 2,168,849 2,359,233 2,335,109 2,344,904
Provision for loan losses 150,000 150,000 150,000 90,000
Investment securities gain 17,477 (4,974) 3 (6,281)
Total other income 229,059 241,130 282,411 274,173
Total other expenses 1,420,298 1,501,635 1,527,168 1,612,925
Income before income taxes 845,087 943,754 940,355 909,871
Net income 610,964 673,063 675,707 714,083
Net income per share .40 .44 .44 .46
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
---- ---------- ---------- ---------- ----------
Total interest income $3,780,886 $3,790,938 $3,672,678 $3,527,709
Total interest expense 1,792,532 1,675,215 1,592,311 1,362,009
Net interest income 1,988,354 2,115,723 2,080,367 2,165,700
Provision for loan losses 141,000 141,000 141,000 150,000
Investment securities gain 1,647 6,244 0 2
Total other income 205,944 243,005 257,633 227,535
Total other expenses 1,216,328 1,376,815 1,302,088 1,429,237
Income before income taxes 838,617 847,157 894,912 814,000
Net income 582,165 603,218 638,858 588,162
Net income per share .38 .39 .42 .38
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
---- ---------- ---------- ---------- ----------
Total interest income $3,497,338 $3,652,438 $3,830,686 $3,888,939
Total interest expense 1,592,567 1,717,471 1,880,663 1,964,826
Net interest income 1,904,771 1,934,967 1,950,023 1,924,113
Provision for loan losses 97,500 97,500 100,500 141,000
Investment securities gain 23,443 0 0 4
Total other income 207,183 191,360 231,450 226,688
Total other expenses 1,227,411 1,204,469 1,204,439 1,179,994
Income before income taxes 810,486 824,358 876,534 829,811
Net income 559,543 584,860 603,940 577,563
Net income per share (1) .36 .38 .39 .38
(1) Adjusted for the 2 percent common stock dividend to stockholders of
record as of December 1, 2000.
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Corporation's consolidated financial statements and the related
information appearing in this Annual Report were prepared by management in
accordance with generally accepted accounting principles and where appropriate
reflect management's best estimates and judgment. The financial statements and
the information related to those statements contained in the Annual Report are
the responsibility of management.
The accounting systems of the Corporation include internal accounting
controls which safeguard the Corporation's assets from material loss or misuse
and ensure that transactions are properly authorized and recorded in its
financial records, and designed to provide reasonable assurance as to the
integrity and reliability of the financial records. There are inherent
limitations in all systems of internal control based on the recognition that the
cost of such systems should not exceed the benefits to be derived. The
accounting system and related controls are reviewed by a program of internal
audits performed by the internal auditor and independent auditors.
Our independent auditors are responsible for auditing the Corporation's
financial statements in accordance with generally accepted auditing standards
and to provide an objective, independent review of the fairness of reported
operating results and financial position of the Corporation.
The Corporation's internal auditor and independent auditors have direct
access to the Audit committee of the Board of Directors. This committee meets
periodically with the internal auditor, the independent auditors, and management
to ensure the financial accounting and audit process is properly conducted.
- --------------------------------------------------------------------------------
SNODGRASS
Certified Public Accountants and Consultants
Independent Auditor's Report
Board of Directors
First West Virginia Bancorp, Inc.
Wheeling, West Virginia
We have audited the accompanying consolidated balance sheets of First West
Virginia Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First West Virginia Bancorp,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of its
operations, and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
S. R. Snodgrass, A.C.
/s/ S. R. Snodgrass, A.C.
- --------------------------
Wheeling, West Virginia
February 7, 2003
S.R. Snodgrass, A.C.
980 National Road Wheeling, WV 26003-6400 Phone: 304-233-5030
Facsimile:304-233-3062
18
First West Virginia Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 6,030,503 $ 6,419,402
Due from banks - interest bearing 66,993 9,075,314
------------ ------------
Total cash and cash equivalents 6,097,496 15,494,716
Federal funds sold 6,403,000 7,632,000
Investment securities:
Available-for-sale (at fair value) 100,377,179 73,348,310
Held-to-maturity (fair value of $7,969,329 and
$9,011,951, respectively) 7,687,930 8,853,851
Loans 136,771,760 120,943,839
Less allowance for possible loan losses (2,026,905) (1,645,972)
------------ ------------
Net loans 134,744,855 119,297,867
Premises and equipment, net 4,242,272 4,005,353
Accrued income receivable 1,284,939 1,252,143
Other intangible assets 458,548 547,300
Goodwill 1,644,119 --
Other assets 1,413,846 1,598,585
------------ ------------
Total assets $264,354,184 $232,030,125
============ ============
LIABILITIES
Noninterest bearing deposits:
Demand $ 21,491,703 $ 20,875,835
Interest bearing deposits:
Demand 34,406,861 31,452,855
Savings 78,270,985 69,545,369
Time 97,206,033 81,897,895
------------ ------------
Total deposits 231,375,582 203,771,954
Federal funds purchased and repurchase agreements 9,037,802 6,537,648
Accrued interest on deposits 493,269 519,399
Other liabilities 987,898 952,156
------------ ------------
Total liabilities 241,894,551 211,781,157
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - 2,000,000 shares authorized at $5 par value:
1,538,443 shares issued at December 31, 2002 and
December 31, 2001 7,692,215 7,692,215
Surplus 4,982,606 4,982,606
Retained earnings 8,566,520 6,954,229
Accumulated other comprehensive income (loss) 1,218,292 619,918
------------ ------------
Total stockholders' equity 22,459,633 20,248,968
------------ ------------
Total liabilities and stockholders' equity $264,354,184 $232,030,125
============ ============
The accompanying notes are an integral part of the financial statements.
19
First West Virginia Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans and lease financing:
Taxable $ 9,432,384 $ 9,683,796 $ 9,614,503
Tax-exempt 536,538 370,335 238,413
Investment securities:
Taxable 3,460,895 3,510,289 3,667,724
Tax-exempt 632,516 622,544 523,470
Dividends 21,801 35,613 35,677
Other interest income 112,681 308,586 409,433
Interest on federal funds sold 111,770 241,048 380,181
----------- ----------- -----------
Total interest income 14,308,585 14,772,211 14,869,401
----------- ----------- -----------
INTEREST EXPENSE
Deposits 4,967,034 6,132,180 6,518,858
Other borrowings 133,456 289,887 636,669
----------- ----------- -----------
Total interest expense 5,100,490 6,422,067 7,155,527
----------- ----------- -----------
Net interest income 9,208,095 8,350,144 7,713,874
PROVISION FOR POSSIBLE LOAN LOSSES 540,000 573,000 436,500
----------- ----------- -----------
Net interest income after provision for
possible loan losses 8,668,095 7,777,144 7,277,374
----------- ----------- -----------
NONINTEREST INCOME
Service charges and other fees 680,793 595,779 535,407
Securities gains 6,225 7,893 23,447
Other operating income 345,980 338,338 321,274
----------- ----------- -----------
Total noninterest income 1,032,998 942,010 880,128
----------- ----------- -----------
NONINTEREST EXPENSE
Salary and employee benefits 3,114,122 2,726,445 2,539,612
Net occupancy expense of premises 982,229 830,792 772,233
Other operating expenses 1,965,675 1,767,231 1,504,468
----------- ----------- -----------
Total noninterest expense 6,062,026 5,324,468 4,816,313
----------- ----------- -----------
Income before income taxes 3,639,067 3,394,686 3,341,189
INCOME TAXES 965,250 982,283 1,015,283
----------- ----------- -----------
Net income $ 2,673,817 $ 2,412,403 $ 2,325,906
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,538,443 1,538,443 1,538,443
=========== =========== ===========
EARNINGS PER COMMON SHARE $ 1.74 $ 1.57 $ 1.51
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
20
First West Virginia Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
---------------------- Retained
Shares Stock Surplus Earnings
--------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 1,508,526 7,542,630 4,739,381 4,638,742
Comprehensive income
Net income -- -- -- 2,325,906
Other comprehensive income, net of tax:
Unrealized gains on securities
net of reclassification
adjustment (see disclosure) -- -- -- --
Comprehensive income
Cash dividend ($.64 per share) -- -- -- (980,542)
Cash paid in lieu of fractional
shares on stock dividend -- -- -- (3,329)
2% common stock dividend at par value 29,917 149,585 243,225 (392,810)
--------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2000 1,538,443 7,692,215 4,982,606 5,587,967
Comprehensive income
Net income -- -- -- 2,412,403
Other comprehensive income, net of tax:
Unrealized gains (losses) on
securities net of
reclassification
adjustment (see disclosure) -- -- -- --
Comprehensive income
Cash dividend ($.68 per share) -- -- -- (1,046,141)
--------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2001 1,538,443 $7,692,215 $4,982,606 $ 6,954,229
Comprehensive income
Net income -- -- -- 2,673,817
Other comprehensive income, net of tax:
Unrealized gains (losses)
on securities net of
reclassification
adjustment (see disclosure) -- -- -- --
Comprehensive income
Cash dividend ($.69 per share) -- -- -- (1,061,526)
--------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2002 1,538,443 $7,692,215 $4,982,606 $ 8,566,520
========= ========== ========== ===========
Accumulated
Other
Compre- Compre-
hensive hensive
Income Income Total
----------- ---------- -----------
BALANCE, DECEMBER 31, 1999 (865,281) 16,055,472
Comprehensive income
Net income -- $2,325,906 2,325,906
Other comprehensive income, net of tax:
Unrealized gains on securities
net of reclassification
adjustment (see disclosure) 827,593 827,593 827,593
----------
Comprehensive income $3,153,499
==========
Cash dividend ($.64 per share) -- (980,542)
Cash paid in lieu of fractional
shares on stock dividend -- (3,329)
2% common stock dividend at par value -- --
---------- -----------
BALANCE, DECEMBER 31, 2000 (37,688) 18,225,100
Comprehensive income
Net income -- $2,412,403 2,412,403
Other comprehensive income, net of tax:
Unrealized gains (losses) on
securities net of
reclassification
adjustment (see disclosure) 657,606 657,606 657,606
----------
Comprehensive income $3,070,009
==========
Cash dividend ($.68 per share) -- (1,046,141)
---------- -----------
BALANCE, DECEMBER 31, 2001 $ 619,918 $20,248,968
Comprehensive income
Net income -- $2,673,817 2,673,817
Other comprehensive income, net of tax:
Unrealized gains (losses)
on securities net of
reclassification
adjustment (see disclosure) 598,374 598,374 598,374
----------
Comprehensive income $3,272,191
==========
Cash dividend ($.69 per share) -- (1,061,526)
---------- -----------
BALANCE, DECEMBER 31, 2002 $1,218,292 $22,459,633
========== ===========
2002 2001 2000
-------- -------- --------
Disclosure of reclassification amount:
Unrealized holding gains (losses)
arising during period $602,276 $662,553 $842,290
Less reclassification adjustment for
gains (losses) included in net income 3,902 4,947 14,697
-------- -------- --------
Net unrealized gains (losses)
on securities $598,374 $657,606 $827,593
======== ======== ========
The accompanying notes are an integral part of the financial statements.
21
First West Virginia Bancorp Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
2002 2001 2000
------------- ------------- ------------
OPERATING ACTIVITIES
Net income $ 2,673,817 $ 2,412,403 $ 2,325,906
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 540,000 573,000 436,500
Depreciation and amortization 434,024 379,761 337,148
Amortization (accretion) of
investment securities, net 337,922 (116,622) (316,940)
Investment security (gains) (6,225) (7,893) (23,447)
Gain on sale of building and land -- (3,110) --
Decrease (increase) in
interest receivable (32,796) 290,981 (186,705)
Increase (decrease) in interest payable (26,130) (78,836) 98,883
Other, net (267,992) (142,981) (231,613)
------------- ------------- ------------
Net cash provided by
operating activities 3,652,620 3,306,703 2,439,732
------------- ------------- ------------
INVESTING ACTIVITIES
Net (increase) decrease
in federal funds sold 1,229,000 (3,236,000) (1,911,000)
Net (increase) decrease in loans,
net of charge-offs (10,948,353) (7,150,128) (3,881,055)
Proceeds from sales of securities
available-for-sale 3,919,956 2,011,728 891,610
Proceeds from maturities of securities
available-for-sale 162,644,000 82,380,000 53,064,000
Proceeds from maturities of securities
held-to-maturity 1,650,000 2,025,000 1,637,000
Principal collected on mortgage-
backed securities 20,802,130 10,346,018 3,558,412
Purchases of securities available-
for-sale (213,766,055) (105,549,065) (68,471,833)
Purchases of securities held-
to-maturity (490,029) -- (1,867,819)
Recoveries on loans previously
charged-off 39,649 30,220 34,308
Cash acquired in purchase of branch
office 9,063,065 8,990,870 --
Purchases of premises and equipment (582,192) (1,565,116) (250,550)
Proceeds from sales of premises
and equipment -- 11,810 --
------------- ------------- ------------
Net cash used in
investing activities (26,438,829) (11,704,663) (17,196,927)
------------- ------------- ------------
FINANCING ACTIVITIES
Net increase in deposits 11,950,361 20,491,247 12,110,646
Dividends paid (1,061,526) (1,046,141) (983,871)
Increase (decrease) in short-
term borrowings 2,500,154 (7,988,680) 4,252,403
------------- ------------- ------------
Net cash provided by
financing activities 13,388,989 11,456,426 15,379,178
------------- ------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS (9,397,220) 3,058,466 621,983
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 15,494,716 12,436,250 11,814,267
------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 6,097,496 $ 15,494,716 $ 12,436,250
============= ============= ============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 5,126,620 $ 6,500,903 $ 7,056,644
Cash paid for income taxes 1,255,000 1,203,765 1,213,168
The accompanying notes are an integral part of the financial statements
22
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First West Virginia Bancorp, Inc. (the
"Corporation") and its subsidiaries conform with accounting principles generally
accepted in the United States of America and with general practices within the
banking industry. The following is a summary of the significant policies:
Nature of Operations
First West Virginia Bancorp, Inc. provides a variety of banking services to
individuals and businesses through the branch network of its two affiliate banks
(the "Banks"). The Banks operate ten full service branches located in Wheeling
(3), Wellsburg, Moundsville (2), New Martinsville, Buckhannon, and Weston, West
Virginia and Bellaire, Ohio. Primary deposit products consist of checking
accounts, savings accounts, and certificates of deposit. Primary lending
products consist of commercial and residential real estate loans, consumer
loans, and business loans.
Principles of Consolidation
The consolidated financial statements of the Corporation include the financial
statements of the parent and its wholly-owned subsidiaries, Progressive Bank,
N.A. and Progressive Bank, N.A.-Buckhannon. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Investment Securities
Investment securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost. The
Corporation uses the interest method to amortize premiums and accrete discounts.
All other securities are classified as available-for-sale and carried at fair
value, with net unrealized gains and losses included in stockholders' equity on
an after-tax basis.
Gains or losses on dispositions of investment securities are computed by using
the adjusted cost of the specific securities sold. Securities gains or losses
are shown separately as non-interest income in the consolidated statements of
income.
Loans
Interest income on loans is accrued based on the principal outstanding. It is
the Corporation's policy to discontinue the accrual of interest when either the
principal or interest is past due 90 days or more, unless the loan is both well
secured and in the process of collection.
The Corporation accounts for impaired loans in accordance with the provisions of
FAS No. 114 and No. 118, "Accounting for Creditors for Impairment of a Loan." It
is the Corporation's policy not to recognize interest income on specific
impaired loans unless the likelihood of future loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized over the contractual life of the
related loans or commitments as an adjustment of the related loan's yield.
Allowance For Loan Losses
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Provisions for depreciation and amortization are computed
generally using the straight-line method over the estimated useful lives of the
assets.
When units of property are disposed of, the premises and equipment accounts are
relieved of the cost and the accumulated depreciation related to such units. Any
resulting gains or losses are credited to or charged against income. Cost of
repairs and maintenance is charged to expense as incurred. Additions and
improvements are capitalized at cost.
23
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Corporation accounts for income taxes under the asset and liability method.
Income tax expense is reported as the total of current income taxes payable and
the net change in deferred income taxes provided for temporary differences.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Deferred income taxes are
recorded at the statutory Federal and state tax rates in effect at the time that
the temporary differences are expected to reverse.
The Corporation files a consolidated Federal income tax return which includes
all its subsidiaries. Income tax expense is allocated among the parent company
and its subsidiaries as if each had filed a separate return.
Cash Flows
Cash and cash equivalents consist of cash on hand and amounts due from banks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Earnings Per Common Share
Earnings per common share are calculated by dividing net income by the
weighted-average number of shares of common stock outstanding during the year.
The Corporation has no securities which would be considered potential common
stock.
Stock Dividends
On October 12, 2000, the Corporation declared a 2% stock dividend to
stockholders of record on December 1, 2000. All common share data includes the
effect of the stock dividends.
Goodwill and Other Intangible Assets
On October 1, 2002, the Financial Accounting Standards Board ("FASB") issued and
the Corporation adopted SFAS No. 147, "Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions from
the scope of both SFAS No. 72, "Accounting for Certain Acquisitions of Banking
and Thrift Institutions" and FASB Interpretation No. 9, "Applying APB Opinions
No. 16 and 17 When a Savings and Loan Association or Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase Method." SFAS
No. 147 requires that these transactions be accounted for in accordance with
FASB Statements No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets." This statement also amends SFAS No. 144 to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower- relationship intangible assets and
credit cardholder intangible assets. The effective date of this Statement is
generally for activities on or after October 1, 2002.
During 2001, the Corporation purchased the deposits of another financial
institution. An identifiable intangible asset resulted from the purchase of the
core deposits and, as such, are amortized into noninterest expense on the
straight-line basis over the period the Corporation expects to benefit from such
assets (7 years). The Corporation recognized amortization expense of $88,751 and
$73,959 during the years ended December 31, 2002 and 2001, respectively. The
unamortized balance from the purchase of these core deposit intangible assets is
$458,548 and $547,300 at December 31, 2002 and 2001, respectively.
The estimated aggregate amortization expense for each of the 5 succeeding years
is as follows:
For the year ended:
2003 $88,751
2004 88,751
2005 88,751
2006 88,751
2007 88,751
Thereafter 14,793
During the second quarter of 2002, the Corporation purchased a less-than-whole
financial institution (the "branch"). An unidentifiable intangible asset
resulted from the purchase of the branch and was amortized in the amount of
$117,436, until the adoption of SFAS No. 147, into noninterest expense on the
straight-line basis over the Corporation's expected benefit from such assets (7
years). As a result of adopting FASB No. 147, the Corporation reclassified
approximately $1.6 million of previously unidentifiable intangible assets to
goodwill, ceased the regularly scheduled amortization expense of those
intangible assets, and reversed the $117,436 amortized to date. In addition, the
Corporation performed its initial impairment analysis of goodwill and determined
that the estimated fair value exceeded the carrying amount.
24
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
The FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supercedes APB Opinion No. 17, "Intangible Assets," but it
does carry forward some guidance from that statement. This statement requires
that an intangible asset that is acquired either individually or with a group of
other assets (but not those acquired in a business combination) shall be
initially recognized and measured based on its fair value. Under SFAS No. 142,
goodwill is not amortized and intangible assets with a finite useful life are
amortized and those intangible assets with an infinite life are not amortized.
This statement is generally effective for fiscal years beginning after December
15, 2001, to all goodwill and other intangible assets recognized in an entity's
statement of financial position at the beginning of that fiscal year, regardless
of when those previously recognized assets were initially recognized. The
Corporation adopted the provisions of SFAS No. 142 on January 1, 2002. The
adoption did not have a material impact on the Corporation.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires an entity to recognize the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Initial application of this statement is as of the beginning of an
entity's fiscal year. Management does not believe the adoption of SFAS No. 143
will have a material impact on the Corporation.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed," and
the Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and
amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
This statement is generally effective for financial statements issued for fiscal
years beginning after December 31, 2001, and interim periods within those fiscal
years. The adoption of SFAS No. 144 did not have a material impact on the
Corporation.
The FASB also issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64,
Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," and an
amendment of that Statement, SFAS No. 64, "Extinguishments of Debt made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate the inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
statement is generally effective for financial statements issued on or after May
15, 2002. The adoption of SFAS No. 145 did not have a material impact on the
Corporation.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. This statement nullifies
Emerging Issues Task Force Issue No. 94-3, which required the recognition of a
liability for an exit cost at the date of an entity's commitment to an exit
plan. The effective date of this Statement is for exit or disposal activities
that are initiated after December 2002, with early application encouraged.
Management believes the adoption of this Statement will not have a material
impact on the Corporation.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. Under the provisions of SFAS No. 123, companies that adopted the
preferable, fair value based method were required to apply that method
prospectively for new stock option awards. This contributed to a "ramp-up"
effect on stock-based compensation expense in the first few years following
adoption, which caused concern for companies and investors because of the lack
of consistency in reported results. To address that concern, SFAS No. 148
provides two additional methods of transition that reflect an entity's full
complement of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. SFAS No. 148 also improves the clarity
and prominence of disclosures about the pro forma effects of using the fair
value based method of accounting for stock-based compensation for all
companies--regardless of the accounting method used--by requiring that the data
be presented more
25
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
prominently and in a more user-friendly format in the footnotes to the financial
statements. In addition, the statement improves the timeliness of those
disclosures by requiring that this information be included in interim as well as
annual financial statements. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on the Corporation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FSAS Interpretation No.
45 did not have a material impact on the Corporation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
NOTE 2 - INVESTMENT SECURITIES
The estimated fair values of investment securities are as follows at
December 31, 2002 and 2001:
December 31, 2002
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Expressed in Thousands)
Securities held to maturity:
Obligations of states and political subdivisions $ 7,688 $ 281 $ -- $ 7,969
-------- ------ ----- --------
Total held to maturity 7,688 281 -- 7,969
-------- ------ ----- --------
Securities available for sale:
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 37,962 495 (4) 38,453
Obligations of states and political subdivisions 11,411 231 (13) 11,629
Corporate debt securities 6,434 349 (8) 6,775
Mortgage-backed securities 42,100 964 -- 43,064
Equity securities 526 23 (93) 456
-------- ------ ----- --------
Total available for sale 98,433 2,062 (118) 100,377
-------- ------ ----- --------
Total $106,121 $2,343 $(118) $108,346
======== ====== ===== ========
26
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
December 31, 2001
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Expressed in Thousands)
Securities held to maturity:
Obligations of states and political subdivisions $ 8,854 $ 162 $ (4) $ 9,012
------- ------ ----- -------
Total held to maturity 8,854 162 (4) 9,012
------- ------ ----- -------
Securities available for sale:
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 31,141 246 (34) 31,353
Obligations of states and political subdivisions 7,792 127 (2) 7,917
Corporate debt securities 7,960 128 (2) 8,086
Mortgage-backed securities 25,008 555 (28) 25,535
Equity securities 458 30 (31) 457
------- ------ ----- -------
Total available for sale 72,359 1,086 (97) 73,348
------- ------ ----- -------
Total $81,213 $1,248 $(101) $82,360
======= ====== ===== =======
The amortized cost and estimated market value of investment securities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Securities Securities
Held to Maturity Available for Sale
--------------------- ---------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
(Expressed in Thousands)
Due in one year or less $ 265 $ 269 $13,709 $ 13,893
Due after one year through five years 4,063 4,240 30,448 31,051
Due after five years through ten years 2,874 2,972 9,710 9,975
Due after ten years 486 488 1,940 1,938
------ ------- ------- --------
7,688 7,969 55,807 56,857
Mortgage-backed securities -- -- 42,100 43,064
Equity securities -- -- 526 456
------ ------- ------- --------
Total $7,688 $ 7,969 $98,433 $100,377
====== ======= ======= ========
Proceeds from sales of securities available-for-sale during the years ended
December 31, 2002, 2001, and 2000, were $3,919,956, $2,011,728, and $891,610,
respectively. Gross gains of $30,703 and gross losses of $24,478 in 2002; gross
gains of $28,885 and gross losses of $20,992 in 2001; and gross gains of $37,956
and gross losses of $14,509 in 2000, were realized on those sales. Assets
carried at $32,125,000 and $30,656,000 at December 31, 2002 and 2001,
respectively, were pledged to secure United States Government and other public
funds and for other purposes as required or permitted by law.
27
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 3 - LOANS AND LEASES
Loans outstanding at December 31, 2002 and 2001, are as follows:
(Expressed in Thousands)
------------------------
2002 2001
-------- --------
Real estate-construction $ 828 $ 395
Real estate-farmland 328 212
Real estate-residential 50,243 44,554
Real estate-secured by non-farm, non-residential 39,027 34,525
Commercial and industrial loans 17,993 13,889
Installment and other loans to individuals 17,634 19,517
Non-rated industrial development obligations 10,783 7,784
Other loans 50 187
-------- --------
Total 136,886 121,063
Less unearned interest and deferred fees 114 119
-------- --------
Net loans $136,772 $120,944
======== ========
The Corporation had no loans at December 31, 2002 and 2001, that were
specifically classified as impaired. Non-accrual loans amounted to $1,566,429
and $1,184,098 at December 31, 2002 and 2001, respectively. The amount of
interest income that would have been recognized had the loans performed in
accordance with their original terms were $97,400 and $96,600 for 2002 and 2001,
respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Balance, beginning of year $1,645,972 $1,302,044 $1,147,720
Additions charged to operating expense 540,000 573,000 436,500
Recoveries 39,649 30,220 34,308
---------- ---------- ----------
Total 2,225,621 1,905,264 1,618,528
Less loans charged-off 198,716 259,292 316,484
---------- ---------- ----------
Balance, end of year $2,026,905 $1,645,972 $1,302,044
========== ========== ==========
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation,
as follows:
December 31, Original
----------------------- Useful Life
2002 2001 Years
---------- ---------- -----------
Land $1,409,103 $1,372,428
Land improvements 293,379 255,755 20
Leasehold improvements 404,598 399,598 25
Buildings 3,824,916 3,660,714 20 - 50
Furniture, fixtures & equipment 2,946,762 2,608,071 3 - 8
---------- ----------
Total 8,878,758 8,296,566
Less accumulated depreciation 4,636,486 4,291,213
---------- ----------
Premises and equipment, net $4,242,272 $4,005,353
========== ==========
Charges to operations for depreciation approximated $345,273, $305,802, and
$337,148 for 2002, 2001, and 2000, respectively.
28
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 6 - DEPOSITS
The composition of the banks' deposits at December 31 follows:
(Expressed in Thousands)
2002
------------------------------------------
Demand
----------------------
Noninterest Interest
Bearing Bearing Savings Time
----------- -------- ------- -------
Individuals, partnerships and corporations $21,159 $30,717 $75,800 $92,310
(Includes certified and official checks)
United States Government 33 -- -- --
States and political subdivisions 290 3,690 2,471 4,716
Commercial banks and other depository institutions 10 -- -- 180
------- ------- ------- -------
Total $21,492 $34,407 $78,271 $97,206
======= ======= ======= =======
(Expressed in Thousands)
2001
------------------------------------------
Demand
----------------------
Noninterest Interest
Bearing Bearing Savings Time
----------- -------- ------- -------
Individuals, partnerships and corporations $19,733 $28,469 $67,085 $78,034
(Includes certified and official checks)
United States Government 40 -- -- --
States and political subdivisions 1,032 2,984 2,460 3,864
Commercial banks and other depository institutions 71 -- -- --
------- ------- ------- -------
Total $20,876 $31,453 $69,545 $81,898
======= ======= ======= =======
Time deposits include certificates of deposit issued in denominations of
$100,000 or more which amounted to $25,261,000 and $21,586,000 at December 31,
2002 and 2001, respectively.
A maturity distribution of time certificates of deposit of $100,000 or more at
December 31, 2002, follows:
Due in three months or less $ 2,567,000
Due after three months through six months 4,163,000
Due after six months through twelve months 2,092,000
Due after one year through five years 16,439,000
-----------
Total $25,261,000
===========
NOTE 7 - INCOME TAX
The provisions for income taxes at December 31 consist of:
2002 2001 2000
--------- --------- ----------
Currently payable:
Federal $ 941,594 $ 974,784 $ 985,940
State 205,450 208,490 189,896
Deferred:
Federal (155,223) (172,208) (118,498)
State (26,571) (28,783) (42,055)
--------- --------- ----------
Income tax expense $ 965,250 $ 982,283 $1,015,283
========= ========= ==========
29
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 7 - INCOME TAX (CONTINUED)
The following temporary differences gave rise to the deferred tax asset at
December 31:
2002 2001
---------- ---------
Allowance for loan losses $ 620,995 $ 473,242
Deferred loan fees 38,889 40,508
Accrued interest on non-performing loans 62,866 45,522
Deferred compensation 200,835 185,061
Deferred directors fees 26,973 30,582
Depreciation 19,307 46,779
Amortization 29,505 13,411
Deferred state income tax (54,965) (45,931)
---------- ---------
Total deferred tax asset - federal 944,405 789,174
Total deferred tax asset - state 161,660 135,092
---------- ---------
1,106,065 924,266
Deferred tax assets (liabilities) arising from market
adjustments of securities available for sale
Federal (618,471) (319,650)
State (106,901) (49,450)
---------- ---------
Total deferred tax assets $ 380,693 $ 555,166
========== =========
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory federal income tax rate to income
before income taxes for the year ended December 31 is as follows:
2002 2001 2000
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
Computed tax at statutory
Federal rate $1,237,283 34.0% $1,154,193 34.0% $1,136,004 34.0%
Plus state income taxes net
Of federal tax benefits 118,060 3.2 118,607 3.5 97,575 2.9
---------- ----- ---------- ---- ---------- ----
1,355,343 37.2 1,272,800 37.5 1,233,579 36.9
Increase (decrease) in taxes
resulting from:
Tax exempt income (398,817) (11.0) (338,464) (10.0) (259,893) (7.7)
Nontaxable goodwill (27,950) (0.8) -- -- -- --
Nondeductible interest expense 34,062 0.9 41,415 1.2 37,608 1.1
Others - net 2,612 0.1 6,532 0.2 3,989 0.1
---------- ----- ---------- ----- ---------- ----
Actual tax expense $ 965,250 26.4% $ 982,283 28.9% $1,015,283 30.4%
========== ===== ========== ===== ========== ====
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory profit-sharing plan for employees meeting
certain service requirements. The Corporation makes annual contributions to the
profit-sharing plan based on income of the Corporation as defined. Total
expenses for the plan were $129,200, $116,200, and $113,200 for the years ended
December 31, 2002, 2001, and 2000, respectively.
The Corporation also offers a 401(k) plan in which it matches a portion of the
employee's contribution up to 4% of their salary. The expense related to the
401(k) plan was $20,410, $19,170, and $19,151 in 2002, 2001, and 2000,
respectively.
30
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 9 - REPURCHASE AGREEMENTS
Repurchase agreements represent borrowings of a short duration, usually less
than 30 days. For repurchase agreements, the securities underlying the
agreements remained under the Banks' control. Information related to repurchase
agreements is summarized below:
2002 2001
----------- -----------
Balance at end of year $ 9,037,802 $ 6,537,648
Average balance during the year 8,339,679 10,033,772
Maximum month-end balance 10,644,067 17,834,576
Weighted-average rate during the year 1.60% 2.89%
Rate at December 31 1.59% 1.42%
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The subsidiary Banks are a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The contract amounts of these instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
The following represents financial instruments whose contract amounts represent
credit risk:
2002 2001
----------- -----------
Commitments to extend credit $15,417,000 $19,390,000
Standby letters of credit 333,000 121,000
As of December 31,2002, approximately $6,978,000 are fixed interest rate
commitments and $8,772,000 are variable interest rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. These guarantees
are primarily issued to support public and private borrowing arrangements. The
standby letters of credit in the amount of $270,000 expire in 2003. All other
standby letters of credit expire in 2012. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
The subsidiary Banks originated advances from the Federal Home Loan Bank of
Pittsburgh ("FHLB") for which there were no outstanding balances as of December
31, 2002. The maximum credit available under these advances are $7 million, and
the agreements expire in December 2003. As members of the FHLB, the subsidiary
Banks have the ability to borrow funds from the FHLB at prevailing interest
rates.
31
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 11 - RELATED PARTY TRANSACTIONS
Directors and officers of the Corporation and its subsidiaries, and their
associates, were customers of, and had other transactions with the subsidiary
Banks in the normal course of business. All loans and commitments included in
such transactions were made on substantially the same terms, including interest
and collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility.
Such loans totaled $5,210,538 at December 31, 2002, and $4,889,208 at December
31, 2001.
The following is an analysis of loan activity to directors, executive officers,
and associates of the Corporation and its subsidiaries:
December 31,
------------------------
2002 2001
---------- -----------
Balance, January 1 $4,889,208 $ 4,242,267
New loans during the period 1,108,406 2,606,078
Repayments during the period (787,076) (1,959,137)
---------- -----------
Ending balance $5,210,538 $ 4,889,208
========== ===========
On May 12, 2001, one of the Corporation's subsidiary banks entered into a lease
agreement to rent property for use as banking premises from a company owned by
one of the Corporation's directors. The lease has an initial term of 5 years, at
an annual rental fee of $57,600, with options to renew for eight 5-year terms.
NOTE 12 - CONCENTRATIONS OF CREDIT RISK
Most of the affiliate Banks' loans and commitments have been granted to
customers in the Banks' primary market areas of Northern and Central West
Virginia, Eastern Ohio, and Southwestern Pennsylvania. In the normal course of
business, however, the Banks have purchased participations and originated loans
outside of their primary market areas. The aggregate loan balances outstanding
in any one geographic area, other than the Banks' primary lending areas, do not
exceed 10% of total loans. No specific industry concentrations exceeded 10% of
total exposure. The concentrations of credit by type of loan are set forth in
Note 3.
NOTE 13 - LEASES
The Corporation's Bank affiliates leased certain land used for banking purposes
under long-term leases, expiring at various dates. These leases contain renewal
options and generally provide that the Corporation will pay for insurance,
taxes, and maintenance.
As of December 31, 2002, the future minimum rental payments required under
noncancellable operating leases with initial terms in excess of one year, are as
follows:
December 31, 2003 $163,661
December 31, 2004 163,661
December 31, 2005 126,411
December 31, 2006 101,911
December 31, 2007 44,711
Thereafter 219,513
Rental expense under operating leases approximated $158,000 in 2002; $106,000 in
2001; and $101,000 in 2000.
32
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 14 - OTHER OPERATING EXPENSES
Other operating expenses at December 31 included the following:
2002 2001 2000
---------- ---------- ----------
Directors fees $ 117,600 $ 148,425 $ 150,375
Stationery and supplies 170,277 155,761 126,701
Regulatory assessment and deposit insurance 121,655 104,399 99,888
Advertising 178,038 144,474 144,691
Postage and transportation 220,043 152,539 135,688
Other taxes 177,535 174,152 139,882
Service Expense 315,735 255,022 224,833
Other 664,792 632,459 482,410
---------- ---------- ----------
Total $1,965,675 $1,767,231 $1,504,468
========== ========== ==========
NOTE 15 - RESTRICTION ON CASH
The subsidiary Banks are required to maintain an average reserve balance with
the Federal Reserve Bank or in cash on hand. The average required reserve
balances for the years ended December 31, 2002 and 2001, were $1,686,000 and
$1,155,000, respectively.
NOTE 16 - LIMITATIONS ON DIVIDENDS
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
subsidiary Banks can declare dividends in 2003, without approval of the
Comptroller of the Currency, of approximately $3.6 million, plus an additional
amount equal to the Bank's net profit for 2003 up to the date of any such
dividend declaration. The subsidiary Banks are the primary source of funds to
pay dividends to the stockholders of First West Virginia Bancorp, Inc.
NOTE 17 - REGULATORY MATTERS
The affiliate Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk, weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002, that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notifications from the Office of the
Comptroller of the Currency categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since those notifications that management believes have
changed the institutions' category.
33
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 17 - REGULATORY MATTERS (CONTINUED)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
(Amounts Expressed in Thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 2002:
Total Capital $20,595 13.2% $12,463 8.0% $15,579 10.0%
(to Risk Weighted Assets)
Tier I Capital $18,653 12.0% $ 6,232 4.0% $ 9,347 6.0%
(to Risk Weighted Assets)
Tier I Capital $18,653 7.1% $ 7,868 3.0% $13,114 5.0%
(to Average Assets)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
(Amounts Expressed in Thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 2001:
Total Capital $20,173 14.3% $11,307 8.0% $14,133 10.0%
(to Risk Weighted Assets)
Tier I Capital $18,527 13.1% $ 5,653 4.0% $ 8,480 6.0%
(to Risk Weighted Assets)
Tier I Capital $18,527 8.4% $ 6,655 3.0% $11,092 5.0%
(to Average Assets)
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
factors. Where possible, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates reflecting varying degrees of risk.
Intangible values assigned to customer relationships are not reflected in the
reported fair values. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year end
or that will be realized in the future.
The following methods and assumptions were used by the Corporation in estimating
the fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amount for cash and short-term
investments is a reasonable estimate of fair value.
Federal Funds Sold: The carrying amount for federal funds is a reasonable
estimate of fair value.
Investment Securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: Fair values for loans are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial, real
estate, and consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.
The fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated discount rates which reflect credit and
interest rate risks inherent to the loan.
Deposits: The carrying amount for noninterest bearing and interest bearing
demand deposits and savings deposits is considered to be a reasonable estimate
of fair value. Fair values for time deposits are estimated using discounted cash
flow analysis. Discount rates reflect rates currently offered for deposits of
similar remaining maturities.
34
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Repurchase Agreements: The carrying amount for repurchase agreements is
considered to be a reasonable estimate of fair value.
Off-Balance-Sheet Instruments: The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. The amount of fees currently charged on commitments are
determined to be insignificant and, therefore, the carrying value and fair value
of off-balance-sheet instruments are not shown.
The estimates of fair values of financial instruments are summarized as
follows at December 31:
(Expressed in Thousands)
-----------------------------------------
2002 2001
------------------- -------------------
Carrying Fair Carrying Fairs
Amount Value Amount Value
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents $ 6,097 $ 6,097 $ 15,495 $ 15,495
Federal funds sold 6,403 6,403 7,632 7,632
Investment securities 108,065 108,346 82,202 82,360
Loans 134,745 135,446 119,298 119,736
Accrued interest receivable 1,285 1,285 1,252 1,252
Financial liabilities:
Deposits 231,375 235,814 203,772 206,496
Repurchase agreements 9,038 9,038 6,538 6,538
Accrued interest payable 493 493 519 519
NOTE 19 - COMPREHENSIVE INCOME
The Corporation is required to present comprehensive income in a full set of
general purpose financial statements for all periods presented. Other
comprehensive income (loss) is comprised exclusively of unrealized holding gains
(losses) on the available-for-sale securities portfolio. The Corporation has
elected to report the effects of other comprehensive income (loss) as part of
the Statement of Changes in Stockholders' Equity. The following represents other
comprehensive income before tax and net of tax.
2002 2001 2000
---------- ---------- ----------
Before-tax amount $ 959,394 $1,054,363 $1,326,909
Tax effect (361,020) (396,757) (499,316)
--------- ---------- ----------
Net-of-tax amount $ 598,374 $ 657,606 $ 827,593
========= ========== ==========
35
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 20 - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, statements of income, and
statements of cash flows for First West Virginia Bancorp, Inc.
BALANCE SHEETS
2002 2001
----------- -----------
ASSETS
Cash $ 150,826 $ 291,990
Investment in common stock - available
for sale (at market value) 463,932 466,183
Investment in subsidiary banks 22,123,732 19,829,215
Prepaid expense 10,605 --
Other assets 305,488 226,408
----------- -----------
Total assets $23,054,583 $20,813,796
=========== ===========
LIABILITIES
Accrued expenses $ -- $ 20,531
Deferred compensation 594,950 544,297
----------- -----------
Total liabilities 594,950 564,828
----------- -----------
STOCKHOLDERS' EQUITY 22,459,633 20,248,968
----------- -----------
Total liabilities and stockholders' equity $23,054,583 $20,813,796
=========== ===========
STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
INCOME
Dividends from subsidiary banks $1,064,580 $1,038,960 $ 957,190
Gain on sale of investments (6,041) 9,160 23,436
Other income 138,549 139,514 143,455
---------- ---------- ----------
Total income 1,197,088 1,187,634 1,124,081
---------- ---------- ----------
EXPENSES
Salary and employee benefits 60,138 101,815 119,315
Interest expense 2,580 2,580 2,580
Other expenses 143,226 137,730 136,863
---------- ---------- ----------
Total expenses 205,944 242,125 258,758
---------- ---------- ----------
Income before income taxes and
equity in undistributed income
of subsidiaries 991,144 945,509 865,323
INCOME TAX BENEFIT 29,347 42,212 37,557
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 1,653,326 1,424,682 1,423,026
---------- ---------- ----------
Net income $2,673,817 $2,412,403 $2,325,906
========== ========== ==========
36
First West Virginia Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000
NOTE 20 - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 2,673,817 $ 2,412,403 $ 2,325,906
Adjustments to reconcile net
income to net cash provided by
operating activities:
Change in deferred tax benefit (10,257) (25,813) (39,179)
Undistributed earnings of affiliates (1,653,326) (1,424,682) (1,413,406)
Changes in operating assets
and liabilities:
Other assets (43,329) (6,675) 1,626
Deferred compensation 42,144 67,500 101,013
Other liabilities (22,627) 225 (16,457)
(Gain)loss on sale of securities 6,041 (9,160) (23,436)
----------- ----------- -----------
Net cash provided by operating activities 992,463 1,013,798 936,067
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of securities 186,589 152,096 91,567
Purchase of investment securities (258,690) (212,247) (155,973)
----------- ----------- -----------
Net cash used in investing activities (72,101) (60,151) (64,406)
----------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid (1,061,526) (1,046,141) (983,871)
----------- ----------- -----------
Net cash used in financing activities (1,061,526) (1,046,141) (983,871)
----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (141,164) (92,494) (112,210)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 291,990 384,484 496,694
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 150,826 $ 291,990 $ 384,484
=========== =========== ===========
Supplemental disclosures:
Cash paid for interest $ 2,580 $ 2,580 $ 2,580
Cash paid for income taxes -- 100 10,435
37
- --------------------------------------------------------------------------------
First West Virginia Bancorp, Inc.
DIRECTORS
Nada E. Beneke ..........................................................Registered Sanitarian
President, Beneke Corporation
Sylvan J. Dlesk ..............................Vice Chairman, First West Virginia Bancorp, Inc.
President & CEO, Dlesk Realty and Investments
President, Dlesk, Inc.
President, Ohio Valley Carpeting, Inc.
President, Tri-State Floor Installations, Inc.
Charles K. Graham ....President and Chief Executive Officer, First West Virginia Bancorp, Inc.
President and Chief Executive Officer, Progressive Bank, N.A.
Vice Chairman, Progressive Bank, N.A. - Buckhannon
Laura G. Inman .......................Chairman of the Board, First West Virginia Bancorp, Inc.
James C. Inman, Jr .....................................................Retired Bank Executive
R. Clark Morton .................................Chairman of the Board, Progressive Bank, N.A.
Attorney at Law
Karl W. Neumann .....................................Chairman Emeritus, Progressive Bank, N.A.
Retired Insurance Executive
Thomas A. Noice ........................................................Retired Bank Executive
William G. Petroplus ..........................................................Attorney at Law
OFFICERS
Laura G. Inman ..........................................................Chairman of the Board
Sylvan J. Dlesk .................................................................Vice Chairman
Charles K. Graham .......................................President and Chief Executive Officer
Beverly A. Barker ................Executive Vice President, Chief Operating Officer, Treasurer
Francie P. Reppy ...............................Senior Vice President, Chief Financial Officer
Connie R. Tenney ...............................................................Vice President
Stephanie A. LaFlam .................................................................Secretary
- --------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
SUBSIDIARY
Progressive Bank N.A.
Wheeling, WV 26003
DIRECTORS OFFICERS
--------- --------
Nada E. Beneke Laura G. Inman R. Clark Morton, Chairman of the Board
Dr. Clyde D. Campbell Tulane B. Mensore Karl W. Neumann, Chairman Emeritus
Robert R. Cicogna R. Clark Morton Charles K. Graham, President & Chief Executive Officer
Sylvan J. Dlesk Karl W. Neumann Beverly A. Barker, Executive Vice President/ Chief Operating Officer/Cashier
Charles K. Graham William G. Petroplus Francie P. Reppy, Senior Vice President, Chief Financial Officer
Robert B. Hunnell, Jr. Thomas L. Sable Brad D. Winwood, Vice President
James C. Inman, Jr. Gary S. Martin, Vice President
David E. Wharton, Vice President/ Information Technology Officer
L. Thomas Campbell, Vice President/ Business Development Officer
DIRECTORS EMERITUS Deborah A. Kloeppner, Vice President/Office Manager Bethlehem
Michele L. Stanley, Vice President/Office Manager Warwood
Edward P. Otte Stephanie A. LaFlam, Secretary/Assistant Vice President/
Human Resource Manager
Janey S. Longwell, Assistant Vice President / Office Manager New Martinsville
Susan E. Reinbeau, Assistant Vice President/Branch Coordinator/
Office Manager Woodsdale
Harold O. Thomas, Senior Business Development Officer
Mitzi K. Mattern, Credit Card Manager/Office Manager Wellsburg
Lisa M. Wagner, Office Manager Moundsville
Susan M. Scotka, Office Manager Bellaire
Rebecca A. Palmer, Manager Data Processing
Laura K. Snedeker, Data Security Officer
Debra M. Tomlin, Loan Officer
Catherine J. Hare, Loan Officer
Kerrie A. Weisenborn, Credit Administrator
SUBSIDIARY
Progressive Bank, N.A. - Buckhannon
Buckhannon, WV 26201
DIRECTORS OFFICERS
--------- --------
William L. Fury Dale F. Riggs Dale F. Riggs, Chairman
Charles K. Graham Douglas K. Stalnaker Charles K. Graham, Vice Chairman
J. Burton Hunter, III Douglas M. Stewart Connie R. Tenney, President/Chief Executive Officer/Cashier/Secretary
David R. Rexroad Connie R. Tenney J. Burton Hunter, III, Assistant Secretary
Rickie E. Rice Patty Ann Smith, Office Manager Weston
Roberta L. Hillyard, Loan Officer
- --------------------------------------------------------------------------------
39
Progressive Bank N.A. - Wheeling
(Photograph) (Photograph) (Photograph)
Warwood Office Woodsdale Office Bethlehem Office
Wheeling, WV Wheeling, WV Wheeling, WV
(Photograph) (Photograph) (Photograph)
Moundsville Main Office Kroger Store Office New Martinsville, WV
Moundsville, WV Moundsville, WV
(Photograph) (Photograph)
Wellsburg, WV Bellaire, OH
Progressive Bank, N.A. - Buckhannon
(Photograph) (Photograph)
Buckhannon Office Weston Office
Buckhannon, WV Weston, WV
40
First West Virginia Bancorp, Inc. and Subsidiaries
Corporate Information
- --------------------------------------------------------------------------------
Corporate Office:
First West Virginia Bancorp, Inc.
1701 Warwood Avenue
Wheeling, WV 26003
(304) 277-1100
Transfer Agent:
Any inquiries related to stockholder records, stock transfers, changes of
ownership, and changes of address should be sent to the transfer agent at the
following address:
Investor Relations Department
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-9982
(800)368-5948
Stock Trading Information:
First West Virginia Bancorp, Inc.'s common stock is traded on the American Stock
Exchange, Inc. primary list under the symbol FWV.
Annual Meeting
The Annual Meeting of Stockholders will be held at 4:00 p.m, on Tuesday, April
8, 2003, at the Warwood Office of Progressive Bank, N.A., 1701 Warwood Avenue,
Wheeling, WV 26003
Form 10-K
Upon written request any shareholder of record on December 31, 2002, may obtain
a copy of the Corporation's 2002 Form 10-K Report (to be filed with the
Securities and Exchange Commission before March 31, 2003) by writing to the
Secretary, First West Virginia Bancorp, Inc., 875 National Road, Wheeling, WV
26003