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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2011.

Or

 

¨ Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from              to             .

Commission File Number: 333-158525

 

 

HOMETOWN BANKSHARES CORPORATION

(Exact name of the registrant as specified in its charter)

 

 

 

Virginia   26-4549960

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

202 South Jefferson Street,

Roanoke, Virginia

  24011
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number: (540) 345-6000

 

(Former name, former address, and former fiscal year, if changed since last report)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of August 11, 2011, 3,241,547 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

 

 

 


Table of Contents

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX

 

PART 1. FINANCIAL INFORMATION   

Item 1.

  

FINANCIAL STATEMENTS

  

Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

     3   

Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2011 and 2010

     4   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     5   

Notes to Consolidated Financial Statements

     6   
Item 2.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     16   
Item 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     21   
Item 4.   

CONTROLS AND PROCEDURES

     21   

PART II. OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     21   
Item 1A.   

Risk Factors

     21   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     21   
Item 3.   

Defaults Upon Senior Securities

     21   
Item 4.   

(Removed and Reserved)

     21   
Item 5.   

Other Information

     21   
Item 6.   

Exhibits

     22   
SIGNATURES      23   

All schedules have been omitted because they are inapplicable or the required information is provided in the financial statements, including the notes thereto.


Table of Contents

HOMETOWN BANKSHARES CORPORATION

Consolidated Balance Sheets

June 30, 2011 and December 31, 2010

 

In Thousands, Except Share and Per Share Data    Unaudited
June 30,
2011
    December 31,
2010
 

Assets

    

Cash and due from banks

   $ 11,983      $ 4,479   

Federal funds sold

     9,288        20,876   

Securities available for sale, at fair value

     59,672        51,603   

Restricted equity securities

     2,467        2,579   

Loans, net of allowance for loan losses of $4,320 in 2011 and $5,228 in 2010

     251,812        258,878   

Property and equipment, net

     8,565        8,772   

Other real estate owned

     6,921        2,976   

Accrued income

     1,176        1,222   

Prepaid FDIC insurance

     648        984   

Other assets

     750        735   
  

 

 

   

 

 

 

Total assets

   $ 353,282      $ 353,104   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 20,910      $ 17,411   

Interest-bearing

     280,321        283,082   
  

 

 

   

 

 

 

Total deposits

     301,231        300,493   

Short term borrowings

     197        281   

Federal Home Loan Bank borrowings

     19,000        21,350   

Accrued interest payable

     656        766   

Other liabilities

     567        558   
  

 

 

   

 

 

 

Total liabilities

     321,651        323,448   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Stockholders’ Equity:

    

Preferred stock, $1,000 par value; 10,000 shares of series A and 374 shares of series B authorized, issued and outstanding at June 30, 2011 and December 31, 2010

     10,374        10,374   

Discount on preferred stock

     (252 )     (287 )

Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,241,547 in 2011 and 2010 (Includes 8,207 restricted shares in 2011 and 2010)

     16,167        16,167   

Surplus

     15,452        15,436   

Retained deficit

     (10,805 )     (11,622 )

Accumulated other comprehensive income (loss)

     695        (412 )
  

 

 

   

 

 

 

Total stockholders’ equity

     31,631        29,656   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 353,282      $ 353,104   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Operations

For the three and six months ended June 30, 2011 and 2010

 

     For the Three
Months Ended
June 30,
    For the Six
Months Ended
June 30,
 
In Thousands, Except Share and Per Share Data    2011      2010     2011      2010  
     (Unaudited)      (Unaudited)     (Unaudited)      (Unaudited)  

Interest income:

          

Loans and fees on loans

   $ 3,552       $ 3,592      $ 7,065       $ 7,005   

Federal funds sold

     10         9        20         20   

Taxable investment securities

     524         478        968         944   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     4,086         4,079        8,053         7,969   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits

     1,034         1,252        2,119         2,536   

Other borrowed funds

     132         143        265         282   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     1,166         1,395        2,384         2,818   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     2,920         2,684        5,669         5,151   
  

 

 

    

 

 

   

 

 

    

 

 

 

Provision for loan losses

     266         3,334        514         3,687   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income (loss) after provision for loan losses

     2,654         (650 )     5,155         1,464   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest income:

          

Service charges on deposit accounts

     125         127        226         246   

Mortgage loan brokerage fees

     11         30        35         47   

Rental income

     26         30        60         61   

Gain on sale of investment securities

     125        —          129        —     

Other income

     9         18        28         31   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     296         205        478         385   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest expense:

          

Salaries and employee benefits

     1,247         1,120        2,463         2,232   

Occupancy and equipment expense

     333         309        665         620   

Data processing expense

     146         114        283         219   

Advertising and marketing expense

     61         140        136         233   

Professional fees

     48         122        151         200   

FDIC insurance assessment

     163         135        352         260   

(Gain) Loss on sale of other real estate owned

     17         —          35        (77

Other expense

     345         285        696         577   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     2,360         2,225        4,781         4,264   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) before income taxes

     590         (2,670 )     852         (2,415 )

Income tax expense

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

     590         (2,670 )     852         (2,415 )
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends accumulated on preferred stock

     133         133        266         266   

Accretion of discount on preferred stock

     17         17        35         34   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) available to common shareholders

   $ 440       $ (2,820 )   $ 551       $ (2,715 )
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) per common share, basic and diluted

   $ .14       $ (0.87 )   $ .17       $ (0.84 )
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding

     3,241,547         3,241,547        3,241,547         3,238,872   
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

4


Table of Contents

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Cash Flows

Six months ended June 30, 2011 and 2010

 

In Thousands    Unaudited
June 30,
2011
    Unaudited
June 30,
2010
 

Cash flows from operating activities:

    

Net income (loss)

   $ 852      $ (2,415 )

Adjustments to reconcile net income (loss) to net cash provided by operations:

    

Depreciation and amortization

     279        309   

Provision for loan losses

     514        3,687   

Amortization of premium on securities, net

     202        122   

Gain on sale of investment securities

     (129 )     —     

Loss (gain) on sale of other real estate

     35        (77 )

Stock compensation expense

     16        26   

Changes in assets and liabilities:

    

Accrued income

     46        (63 )

Other assets

     321        (177 )

Accrued interest payable

     (110 )     (359

Other liabilities

     9        254   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     2,035        1,307   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in federal funds sold

     11,588        7,378   

Purchases of investment securities

     (19,243 )     (16,029 )

Sales/maturities of available for sale securities

     12,208        13,127   

Redemption (purchase) of restricted equity securities, net

     112        (252 )

Net (increase) decrease in loans

     2,425        (15,263 )

Transfers to or Proceeds from sale of other real estate

     147       344   

Purchases of property and equipment

     (72 )     (1,065 )
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     7,165        (11,760 )
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in noninterest-bearing deposits

     3,499        (860 )

Net (decrease) increase in interest-bearing deposits

     (2,761 )     15,359   

Net decrease in short-term borrowings

     (84 )     (600 )

Net decrease in long-term FHLB borrowings

     (2,350 )     (2,650 )

Preferred stock dividend payment

     —          (266 )
  

 

 

   

 

 

 

Net cash flows (used in) provided by financing activities

     (1,696 )     10,983   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     7,504        530   

Cash and cash equivalents, beginning

     4,479        7,051   
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 11,983      $ 7,581   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash payments for interest

   $ 2,494      $ 3,177   
  

 

 

   

 

 

 

Cash payments for income taxes

   $ —        $ —     
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing activities:

    

Unrealized gain on securities available for sale

   $ 1,107      $ 1,126   
  

 

 

   

 

 

 

Transfer from loans to other real estate

   $ 4,127      $ 129   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

5


Table of Contents

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

On September 4, 2009, Hometown Bankshares Corporation (the “Company”) acquired all outstanding stock of Hometown Bank (the “Bank”) in an exchange for shares of the Registrant on a one-for-one basis to become a single-bank holding company with the Bank becoming a wholly-owned subsidiary. The Bank was organized and incorporated under the laws of the State of Virginia on November 9, 2004 and commenced operations on November 14, 2005. The Bank currently serves Roanoke City, Virginia, the County of Roanoke, Virginia, the City of Salem, Virginia, Christiansburg, Virginia, Smith Mountain Lake and surrounding areas. As a state chartered bank which is a member of the Federal Reserve System, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Board.

Basis of Presentation

The consolidated financial statements as of June 30, 2011 and for the periods ended June 30, 2011 and 2010 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2010, included in the Company’s Form 10-K for the year ended December 31, 2010.

The accounting and reporting policies of the Company follow generally accepted accounting principles and general practices within the financial services industry.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary HomeTown Bank. All significant intercompany accounts and transactions associated with the Company’s wholly-owned subsidiary have been eliminated.

Our accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K. Please refer to the Form 10-K for these policies.

On May 18, 2010, the Company declared a 10% stock split, whereby each stockholder received one additional share for each ten shares owned. The shares were distributed on July 19, 2010 to stockholders of record at the close of business on June 18, 2010. All applicable share and per-share amounts in the consolidated financial statements and related disclosures have been retroactively adjusted to reflect this stock dividend.

Note 2. Investment Securities

The amortized cost and fair value of securities available for sale as of June 30, 2011 and December 31, 2010, are as follows:

 

(Dollars In Thousands)    June 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

U. S. Government agency securities

   $ 26,816       $ 217       $ (69 )   $ 26,964   

Mortgage-backed securities

     29,085         502         (13 )     29,574   

Municipal securities

     3,076         74         (16 )     3,134   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 58,977       $ 793       $ (98 )   $ 59,672   
  

 

 

    

 

 

    

 

 

   

 

 

 
(Dollars In Thousands)    December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

U. S. Government agency securities

   $ 23,632       $ 210       $ (497 )   $ 23,345   

Mortgage-backed securities

     26,343         52         (75 )     26,320   

Municipal securities

     2,040         —           (102 )     1,938   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 52,015       $ 262       $ (674 )   $ 51,603   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

6


Table of Contents

As of June 30, 2011, there were no individual securities that had been in a continuous loss position for more than 12 months.

The following table demonstrates the unrealized loss position of securities available for sale at June 30, 2011 and December 31, 2010.

 

     June 30, 2011  
     Less than 12 months     12 months or more      Total  
(Dollars In Thousands)    Estimated
Fair
Value
     Unrealized
Loss
    Estimated
Fair
Value
     Unrealized
Loss
     Estimated
Fair
Value
     Unrealized
Loss
 

U. S. Government agency securities

   $ 6,977       $ (69 )   $ —         $ —         $ 6,977       $ (69 )

Mortgage-backed securities

     4,829         (13 )     —           —           4,829         (13 )

Municipal securities

     1,056         (16 )     —           —           1,056         (16 )
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,862       $ (98 )   $ —         $ —         $ 12,862       $ (98 )
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Less than 12 months     12 months or more      Total  
(Dollars In Thousands)    Estimated
Fair
Value
     Unrealized
Loss
    Estimated
Fair
Value
     Unrealized
Loss
     Estimated
Fair
Value
     Unrealized
Loss
 

U. S. Government agency securities

   $ 14,833       $ (497 )   $ —         $ —         $ 14,833       $ (497 )

Mortgage-backed securities

     16,086         (75 )     —           —           16,086         (75 )

Municipal securities

     1,686         (102 )     —           —           1,686         (102 )
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 32,605       $ (674 )   $ —         $ —         $ 32,605       $ (674 )
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

There are 20 debt securities with fair values totaling $12.9 million considered temporarily impaired at June 30, 2011. The primary cause of impairment was fluctuations in interest rates. At June 30, 2011, the Company does not consider any bond in an unrealized loss position to be other than temporarily impaired.

The Company realized a $129 thousand gain on sale of its available for sale securities for the six months ended June 30, 2011 and had no realized gain or loss on sale of securities in the same period of 2010.

The amortized cost and estimated fair values of investment securities available for sale at June 30, 2011 are as follows:

 

(Dollars In Thousands)    Amortized
Cost
     Estimated
Fair
Value
 

One year or less

   $ —         $ —     

Over one through five years

     1,672         1,698   

Over five through ten years

     13,370         13,457   

Greater than 10 years

     43,935         44,517   
  

 

 

    

 

 

 
   $ 58,977       $ 59,672   
  

 

 

    

 

 

 

Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at June 30, 2011 and December 31, 2010 were as follows:

 

(Dollars In Thousands)    June 30,
2011
    December 31,
2010
 

Construction:

    

Residential

   $ 6,125      $ 7,608   

Land acquisition, development & commercial

     26,407        28,981   

Real Estate:

    

Residential

     54,272        55,381   

Commercial

     108,042        109,674   

Commercial, industrial & agricultural

     36,856        39,204   

Equity lines

     20,269        20,121   

Consumer

     4,161        3,137   
  

 

 

   

 

 

 

Total Loans

   $ 256,132      $ 264,106   
  

 

 

   

 

 

 

Less allowance for loan losses

     (4,320 )     (5,228 )
  

 

 

   

 

 

 

Loans, net

   $ 251,812      $ 258,878   
  

 

 

   

 

 

 

 

7


Table of Contents

The past due and non accrual status of loans as of June 30, 2011 was as follows:

 

(Dollars In Thousands)   

30-59 Days

Past Due

    

60-89 Days

Past Due

    

90 Days or

More Past

Due

    

Total Past

Due

     Current     

Total

Loans

    

Nonaccrual

Loans

 

Construction:

                    

Residential

   $ —         $ —         $ 224       $ 224       $ 5,901       $ 6,125       $ 224   

Land acquisition, development & commercial

     747         —           1,276         2,023         24,384         26,407         1,276   

Real Estate:

                    

Residential

     562         —           214         776         53,496         54,272         440   

Commercial

     3,363         563         —           3,926         104,116         108,042         —     

Commercial, industrial & agricultural

     339         —           —           339         36,517         36,856         —     

Equity lines

     227         437         —           664         19,605         20,269         —     

Consumer

     —           4         —           4         4,157         4,161         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,238       $ 1,004       $ 1,714       $ 7,956       $ 248,176       $ 256,132       $ 1,940   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The past due and non accrual status of loans as of December 31, 2010 was as follows:

 

(Dollars In Thousands)   

30-59 Days

Past Due

    

60-89 Days

Past Due

    

90 Days or

More Past

Due

    

Total Past

Due

     Current     

Total

Loans

    

Nonaccrual

Loans

 

Construction:

                    

Residential

   $ —         $ —         $ 224       $ 224       $ 7,384       $ 7,608       $ 224   

Land acquisition, development & commercial

     960         429         2,166         3,555         25,426         28,981         2,166   

Real Estate:

                 —           

Residential

     261         5,016         875         6,152         49,229         55,381         875   

Commercial

     —           —           —           —           109,674         109,674      

Commercial, industrial & agricultural

     —           —           419         419         38,785         39,204         419   

Equity lines

     202         132         —           334         19,787         20,121         —     

Consumer

     2         —           —           2         3,135         3,137         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,425       $ 5,577       $ 3,684       $ 10,686       $ 253,420       $ 264,106       $ 3,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans past due ninety days or more and still accruing interest at June 30, 2011 or December 31, 2010.

 

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Table of Contents

Impaired loans, which include TDRs of $1.9 million and their related allowance at June 30, 2011, were as follows:

 

(Dollars In Thousands)   

Recorded

Investment in

Loans

    

Unpaid

Principal

Balance

    

Related

Allowance

    

Average

Balance Total

Loans

    

Interest Income

Recognized

 

Construction:

              

Residential

   $ 1,439       $ 1,439       $ 29       $ 1,818       $ 17   

Land acquisition, development & commercial

     5,670         6,351         241         6,759         80   

Real Estate:

              

Residential

     184         184         —           3,044         26   

Commercial

     7,730         7,730         239         8,633         157   

Commercial, industrial & agricultural

     313         313         —           329         6   

Equity lines

     —           —           —           44         —     

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,336       $ 16,017       $ 509       $ 20,627       $ 286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans, which include TDRs of $1.9 million and their related allowance at December 31, 2010 were as follows:

 

(Dollars In Thousands)   

Recorded

Investment in

Loans

    

Unpaid

Principal

Balance

    

Related

Allowance

    

Average

Balance Total

Loans

    

Interest Income

Recognized

 

Construction:

              

Residential

   $ 2,007       $ 2,007       $ —         $ 1,250       $ 36   

Land acquisition, development & commercial

     7,893         9,229         1,065         7,349         239   

Real Estate:

              

Residential

     7,210         7,210         175         6,903         192   

Commercial

     9,302         9,302         282         6,322         273   

Commercial, industrial & agricultural

     428         428         —           960         17   

Equity lines

     —           —           —           49         —     

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,840       $ 28,176       $ 1,522       $ 22,833       $ 757   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

 

(Dollars In Thousands)    June 30,
2011
    December 31,
2010
 

Balance at the beginning of the year

   $ 5,228      $ 2,862   

Provision charged to operations

     514        6,453   

Recoveries of loans charged off

     3        77   

Loans charged off

     (1,425 )     (4,164 )
  

 

 

   

 

 

 

Balance at the end of the year

   $ 4,320      $ 5,228   
  

 

 

   

 

 

 

 

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Table of Contents

The following table presents, as of June 30, 2011, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

 

     Construction     Real Estate                                  
     Residential    

Land

acquisition,

development

& commercial

    Residential     Commercial    

Commercial,

industrial &

agricultural

   

Equity

lines

    Consumer      Unallocated      Total  

Beginning balance

   $ 121      $ 1,802      $ 785      $ 1,556      $ 702      $ 222      $ 40       $ —         $ 5,228   

Charge-offs

     —          (877 )     (170 )     (106 )     (139 )     (133 )     —           —           (1,425 )

Recoveries

     —          —          —          —          —          —          3         —           3   

Provisions

     (71 )     496        (60 )     (388 )     327        189        41         —           514   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 50      $ 1,421      $ 555      $ 1,042      $ 890      $ 278      $ 84       $ —         $ 4,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: Individually evaluated for impairment

   $ 29      $ 241      $ —        $ 239      $ —        $ —        $ —         $ —         $ 509   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: Collectively evaluated for impairment

   $ 21      $ 1,180      $ 555      $ 803      $ 890      $ 278      $ 84       $ —         $ 3,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending balance

   $ 6,125      $ 26,407      $ 54,272      $ 108,042      $ 36,856      $ 20,269      $ 4,161       $ —         $ 256,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: Individually evaluated for impairment

   $ 1,439      $ 5,670      $ 184      $ 7,730      $ 313      $ —        $ —         $ —         $ 15,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: Collectively evaluated for impairment

   $ 4,686      $ 20,737      $ 54,088      $ 100,312      $ 36,543      $ 20,269      $ 4,161       $ —         $ 240,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

The following table presents, as of December 31, 2010, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

Allowance for loan losses:

 

     Construction      Real Estate                              
     Residential     

Land acquisition,

development &

commercial

     Residential      Commercial     

Commercial,

industrial &

agricultural

    

Equity

lines

     Consumer      Total  

Ending balance

   $ 121       $ 1,802       $ 785       $ 1,556       $ 702       $ 222       $ 40       $ 5,228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: Individually evaluated for impairment

   $ —         $ 1,065       $ 175       $ 282       $ —         $ —         $ —         $ 1,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: Collectively evaluated for impairment

   $ 121       $ 737       $ 610       $ 1,274       $ 702       $ 222       $ 40       $ 3,706   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                       

Ending balance

   $ 7,608       $ 28,981       $ 55,381       $ 109,674       $ 39,204       $ 20,121       $ 3,137       $ 264,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: Individually evaluated for impairment

   $ 2,007       $ 7,893       $ 7,210       $ 9,302       $ 428       $ —         $ —         $ 26,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: Collectively evaluated for impairment

   $ 5,601       $ 21,088       $ 48,171       $ 100,372       $ 38,776       $ 20,121       $ 3,137       $ 237,266   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans by credit quality indicators as of June 30, 2011 were as follows:

 

(Dollars In Thousands)    Pass     

Special

Mention

     Substandard     

Substandard

Nonaccrual

     Doubtful      Total  

Construction:

                 

Residential

   $ 4,686      $ —         $ 1,215       $ 224       $ —         $ 6,125   

Land acquisition, development & commercial

     17,493         2,166         4,828         1,276         644         26,407   

Real Estate:

                 

Residential

     48,308         495         5,029         440         —           54,272   

Commercial

     96,885         3,000         8,157         —           —           108,042   

Commercial, industrial & agricultural

     35,667         4         1,185         —           —           36,856   

Equity lines

     20,269         —           —           —           —           20,269   

Consumer

     4,161         —           —           —           —           4,161   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 227,469       $ 5,665       $ 20,414       $ 1,940       $ 644       $ 256,132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans by credit quality indicators as of December 31, 2010 were as follows:

 

(Dollars In Thousands)    Pass     

Special

Mention

     Substandard     

Substandard

Nonaccrual

     Total  

Construction:

              

Residential

   $ 5,250       $ 350       $ 1,784       $ 224       $ 7,608   

Land acquisition, development & commercial

     18,564         2,524         5,727         2,166         28,981   

Real Estate:

              

Residential

     47,782         223         6,501         875         55,381   

Commercial

     94,965         5,152         9,557         —           109,674   

Commercial, industrial & agricultural

     37,239         35         1,511         419         39,204   

Equity lines

     20,121         —           —           —           20,121   

Consumer

     3,059         —           78         —           3,137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 226,980       $ 8,284       $ 25,158       $ 3,684       $ 264,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011 the Company does not have any loans classified as Loss and at December 31, 2010, the Company did not have any loans classified as Doubtful or Loss.

Note 5. Stock Based Compensation

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Company’s Board of Directors may grant stock options to directors, officers and employees. The Plan authorizes grants of options to purchase up to 550,000 shares of the Company’s authorized but unissued common stock. Accordingly, options for the purchase of 486,360 shares of authorized common stock have been issued under the Plan and 63,640 shares of authorized common stock are available for issue under the Plan. There are options for 486,360 shares granted currently outstanding as of June 30, 2011, of which, 461,793 options are vested. All stock options have been granted with an exercise price equal to the stock’s fair market value at the date of the grant. As of June 30, 2011, no options have been exercised. The Company recorded compensation expense of $12 thousand and $24 thousand for the six months ended June 30, 2011 and 2010, respectively. The aggregate intrinsic value of outstanding stock options was $0 at June 30, 2011. The weighted average remaining contractual term of outstanding options was 5.1 years at June 30, 2011.

The Board of Directors adopted a Restricted Stock Plan (“the Plan”) in September 2009 whereby 120,000 shares of the Company’s authorized but unissued common stock was set aside to be granted by the Board of Directors in its discretion. The principal purpose of the Plan was to make shares available for issue to the executive officers of the Company and the Bank in payment of incentives earned under the Incentive Compensation Plan. Because the Company is a TARP participant, the Company’s most highly paid employee cannot be paid a cash bonus. However, the Treasury regulations permit payment of such a bonus in restricted stock. Even though the restriction would only apply to the CEO in the case of the Company and the Bank, each of the executive officers of the Company and the Bank have elected to take their bonuses in stock rather than cash.

The restrictions attached to stock issued under the Plan restrict transfer of the shares during the time TARP funding is outstanding and provide for vesting over a five-year period. During the first quarter of 2010, the Company issued 8,207 shares of stock under the Plan.

The remaining unamortized compensation expense for stock options and restricted stock was $128 thousand at June 30, 2011 and will be recognized over the next 3.25 years.

Note 6. Fair Value Measurement

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

Level 1-Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2-Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3-Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

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Table of Contents

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

Derivative assets: Derivative assets are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar assets by using pricing models that considers observable market data (Level 2).

Derivative liabilities: Derivative liabilities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar liabilities by using pricing models that considers observable market data (Level 2).

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

(Dollars In Thousands)           Carrying value at June 30, 2011

Description

   Balance as of
June 30,
2011
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)

Assets:

           

U. S. Government agency securities

   $ 26,964          $ 26,964      

Mortgaged-backed securities

     29,574            29,574      

Municipal securities

     3,134            3,134      

Derivative assets

     250            250      

Liabilities:

           

Derivative liabilities

   $ 250          $ 250      
(Dollars In Thousands)           Carrying value at December 31, 2010

Description

   Balance as of
December 31,
2010
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)

Assets:

           

U. S. Government agency securities

   $ 23,345          $ 23,345      

Mortgaged-backed securities

     26,320            26,320      

Municipal securities

     1,938            1,938      

Derivative assets

     301            301      

Liabilities:

           

Derivative liabilities

   $ 301          $ 301      

 

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Table of Contents

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or writedowns of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

Other Real Estate Owned (OREO): Foreclosed assets are adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair market value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the OREO as nonrecurring Level 2. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the OREO as nonrecurring Level 3.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of June 30, 2011 and December 31, 2010.

 

(Dollars In Thousands)           Carrying value at June 30, 2011  

Description

   Balance as of
June 30,
2011
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Impaired Loans, net of valuation allowance

   $ 14,827             $ 14,827   

Other real estate owned

   $ 6,921          $ 6,921      
(Dollars In Thousands)           Carrying value at December 31, 2010  

Description

   Balance as of
December 31,
2010
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Impaired Loans, net of valuation allowance

   $ 25,318          $ 211       $ 25,107   

Other real estate owned

   $ 2,976          $ 2,976      

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

Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. Management believes the carrying value of federal funds sold approximates estimated market value.

 

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Table of Contents

Available-for-sale and restricted equity securities: Fair values for securities, excluding restricted equity 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. The carrying values of restricted equity securities approximate fair values, based on the redemption provisions of the entities.

Loans receivable: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated contractual maturities on such time deposits.

Short term borrowings: Short term borrowings consist of overnight borrowings and mature within one to three days.

Management believes the carrying value of securities sold under agreements to repurchase approximates estimated market value.

FHLB borrowings: The fair values for long term borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long term borrowings to the contractual maturities on such long term borrowings.

Accrued interest: The carrying amount of accrued interest receivable and payable approximates its fair value.

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At June 30, 2011 and December 31, 2010, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

The carrying amounts and approximate fair values of the Company’s financial instruments are as follows at June 30, 2011 and December 31, 2010:

 

(Dollars in Thousands)    June 30, 2011      December 31, 2010  
     Carrying
Amounts
     Approximate
Fair Values
     Carrying
Amounts
     Approximate
Fair Values
 

Financial assets

           

Cash and due from banks

   $ 11,983       $ 11,983       $ 4,479       $ 4,479   

Federal funds sold

     9,288         9,288         20,876         20,876   

Securities available-for-sale

     59,672         59,672         51,603         51,603   

Loans, net

     251,812         249,136         258,878         256,127   

Accrued income

     1,176         1,176         1,222         1,222   

Derivative assets

     250         250         301         301   

Financial liabilities

           

Total deposits

     301,231         301,973         300,493         301,233   

Short term borrowings

     197         197         281         281   

FHLB borrowings

     19,000         19,748         21,350         22,246   

Accrued interest payable

     656         656         766         766   

Derivative liabilities

     250         250         301         301   

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-looking Statements

HomeTown Bankshares makes forward-looking statements in this report. These forward-looking statements may include: statements of goals, intentions, earnings expectations, and other expectations; estimates of risks and of future costs and benefits; assessments of probable loan and lease losses; assessments of market risk; and statements of the ability to achieve financial and other goals. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. The Company does not assume any duty and does not undertake to update its forward-looking statements. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that the Company anticipated in its forward-looking statements, and future results could differ materially from historical performance.

The Company’s forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit, loan, and investment products and other financial services; changes in real estate values; changes in the quality or composition of the Company’s loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Company’s ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties. The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2010. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.

In May 2010, the Company declared a stock split, whereby each stockholder received one additional share for each ten shares owned. The shares were distributed on July 19, 2010 to stockholders of record at the close of business on June 18, 2010. All applicable share and per share data in this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively adjusted to give effect to this stock split.

Our Business

HomeTown Bankshares provides a full complement of consumer and commercial banking services to its primary service area which includes the City of Roanoke, Roanoke County, Christiansburg, and Salem, Virginia and contiguous counties, including Bedford and Franklin, Virginia. We place an emphasis on personal service and offer a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, residential and commercial mortgages, home equity loans, consumer installment loans, commercial loans, lines and letters of credit. In addition to its main office, the Company has offices in Franklin County, Virginia at Westlake, in Roanoke County at the intersection of Colonial Avenue and Virginia Route 419, Virginia and in the City of Roanoke at 3521 Franklin Road.

The following is a discussion of factors that significantly affected the financial condition and results of operations of HomeTown Bankshares Corporation. This discussion should be read in connection with the financial statements presented herein.

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 of the Notes to Financial Statements in the Annual Report for the year ended December 31, 2010. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses.

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) that losses be accrued when they are probable of occurring and are capable of estimation and (ii) that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. 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 collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a detailed quarterly analysis of the allowance based on our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and the economic trend. These are generally grouped by homogeneous loan pools. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.

 

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Discussion of Operations

Six Months Ended June 30, 2011

The Company recorded net income of $852 thousand for the six months ended June 30, 2011 compared with a net loss of $2.4 million for the six months ended June 30, 2010. After net accumulated dividends on preferred stock of $301 thousand in 2011, the company had net income available to common shareholders of $.17 per share, compared with a net loss of $.84 per share in 2010.

For the six months ended June 30, 2011, net interest income increased $518 thousand from $5.2 million in 2010 to $5.7 million in 2011. This increase in net interest income is due to average earning assets increasing by $11.3 million in 2011 compared to 2010 and improvement in the net interest margin of 20 basis points to 3.38% for the six months ended June 30, 2011 compared to the same period in 2010. The improvement in the net interest margin is primarily due to the reduction in the cost of funds from 1.83% in 2010 to 1.47% in 2011.

The provision for loan losses was $514 thousand for the first half of 2011, compared to $3.7 million for the same period last year. Impaired loans totaled $15.3 million at June 30, 2011 compared to $27.9 million on the same day a year ago. The allowance for loan losses was increased significantly in the second and fourth quarters of 2010. The lower provision in the current year compared to last year is due to decreased specific reserves. Specific reserves for impaired loans were $509 thousand at June 30, 2011, down $1.2 million from the $1.8 million required at June 30, 2010. The loan loss reserves for pools of loans that do not have identified specific loan loss reserves was $3.8 million at June 30, 2011, $652 thousand higher than the $3.2 million a year ago. The adequacy of general reserves is determined by dividing the remaining loan portfolio into 30 homogenous pools, each with its unique degree of inherent risk and applying a loss factor to each pool of loans. In determining the loss factor for each pool of homogenous loans the following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans and classified loans.

In the first six months of 2011, noninterest income increased from $385 thousand in 2010 to $478 thousand. In 2011 non recurring income from gains on the sale of investment securities totaled $129 thousand. In recurring other income categories, service charges on deposit accounts decreased from $246 thousand in 2010 to $226 thousand in 2011, a decrease of $20 thousand or 8.1%. Mortgage loan brokerage fees decreased by $12 thousand from the first six months of 2010 due to the softness of the residential housing market.

Noninterest expense increased $517 thousand or 12% for the six months ended June 30, 2011 when compared to the same period in 2010. Salaries and employee benefits increased $231 thousand or 10% from $2.2 million in 2010 to $2.5 million in 2011. This increase is due to increases in staffing to manage non performing assets and the creation in 2011 of an internal loan review department. In addition, the company has experienced increases in the cost of health insurance and a reduction in the amount of salary and benefit costs that is deferred for the origination of loans as loan production in 2011 is less than it was in 2010.

Occupancy and equipment expense increased $45 thousand to $665 thousand from $620 thousand for the six months ended June 30, 2011 compared to 2010. Lease expense increased $22 thousand due to a new lease entered into in the second half of 2010. Increases in real estate taxes of $26 thousand were the result of the new property leased in 2010 and taxes associated with increased foreclosure activity. FDIC Deposit Insurance increased $92 thousand from $260 thousand for the six months ended June 30, 2010 to $352 thousand for the six months ended June 30, 2011. This increase was due to the growth in total deposits from 2010 to 2011 along with an increase in the FDIC insurance rate. Data processing expense increased $63 thousand or 29% from 2010 to 2011 due to the growth in the volume of customer accounts and the cost of some new enhancements to our core system software. Advertising and marketing expense was $97 thousand less in 2011 compared to 2010 due to an advertising campaign conducted in the second quarter of 2010 that was not repeated in 2011. Professional fees for the six months ended June 30, 2011 were $49 thousand less than the same period last year. Lower consulting fees in 2011, were partially offset by increased legal fees related to non-performing assets.

Three Months Ended June 30, 2011

The Company recorded net income of $590 thousand for the three months ended June 30, 2011 compared with a net loss of $2.7 million for the same period in 2010. After net accumulated dividends on preferred stock of $150 thousand in 2011 and 2010, the company had net income available to common shareholders of $.14 per share for the second quarter of 2011, and a net loss of $.87 per share for the second quarter of 2010.

Net interest income for the three months ended June 30, 2011 was $2.9 million, an increase of $236 thousand over the same period a year ago due primarily to a lower cost of funds.

The provision for loan losses was $266 thousand for second quarter of 2011 and $3.3 million for the second quarter of 2010. The lower provision in the current year compared to last year is due to decreased specific reserves, as discussed previously.

Noninterest income was $296 thousand and for the three months ended June 30, 2011, $91 thousand or 44% higher than the $205 thousand earned during the same period of time last year. The increase was due to realized gains on the sale of investment securities of $125 thousand during the second quarter of 2011.

Noninterest expense was $2.4 million for the quarter ended June 30, 2011, $135 thousand higher than the $2.2 million for the quarter ended June 30, 2010. Salaries and employee benefits increased $127 thousand from $1.1 million for the three months ended June 30, 2010 to $1.2 million for the three months ended June 30, 2011. The increase was largely attributable to additional staffing to increase the resources available to manage the collection of non-performing assets.

Financial Condition

The Company had total assets of $353 million at June 30, 2011 and at December 31, 2010. At June 30, 2011, assets were comprised principally of loans, cash and due from banks, federal funds sold, and investment securities. Net loans totaled $252 million at June 30, 2011, compared to $259 thousand at year end 2010. Federal funds sold decreased to $9.3 million at June 30, 2011 from $20.9 million at December 31, 2010. Investment securities increased $8.1 million from December 31, 2010 to $59.7 million at the end of the second quarter of 2011.

The Company’s liabilities at June 30, 2011 totaled $322 million compared to $323 million at December 31, 2010, a decrease of $1.8 million or 1%. Noninterest-bearing deposits increased by $3.5 million, while interest-bearing deposits decreased $2.8 million to $280 million at June 30, 2011.

At June 30, 2011 and December 31, 2010, the Company had stockholders’ equity of $31.6 million and $29.7 million, respectively, an increase of $2.0 million or 6.7%. The increase in stockholders’ equity during the six months of 2011 resulted from net income of $852 thousand, and an increase in the market value of investment securities available for sale of $1.1 million.

On September 18, 2009, as part of the Troubled Asset Relief Program-Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement with the United States Department of the Treasury pursuant to which the Company issued 10 thousand shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A for a purchase price of $10 million in cash and issued a warrant to purchase 374.37437 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B for a per share price of $1.00 per share, which was exercised immediately. For the twelve months ended June 30, 2011, the Company has a net loss of $606 thousand and is prevented by regulations from paying dividends on its preferred stock. At June 30, 2011, the preferred dividends in Arrears totaled $534 thousand.

 

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Management believes the Company has sufficient capital to fund its operations. At June 30, 2011, the Company was in compliance with all regulatory capital requirements. Management believes that the Company has sufficient liquidity on a short-term basis to meet any funding needs it may have, and expects that its long term liquidity needs can be achieved through deposit growth, however there can be no assurance that such growth will develop.

Non-performing Assets

Non-performing assets consist of loans past-due ninety days or more and still accruing interest, non-accrual loans and repossessed and foreclosed assets. The Company had no loans past due or more and still accruing interest and 7 nonaccrual loans totaling $1.9 million as well as $6.9 million of other real estate owned at June 30, 2011. Non performing assets at December 31, 2010 totaled $6.7 million.

Allowance for Loan Losses

The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

Specific loss reserves for loans individually evaluated for impairment totaled $509,000 at June 30, 2011 compared to $1,522,000 at December 31, 2010, a decrease of $1.0 million. Impaired loans declined $11.5 million from $26.8 million at December 31, 2010 to $15.3 million at June 30, 2011. This decrease in the level of impaired loans was due primarily to foreclosure on properties securing impaired loans totaling $4.4 million in the first six months of 2011, and the upgrading of three loans to one borrower totaling $4.8 million. The loans to this borrower were past due at December 31, 2010 but were paid current in the first quarter. The loans are secured by rental properties and rent payments have been directed to a lockbox arrangement under the control of the Bank. General loss reserves totaled $3.8 million at June 30, 2011 compared to $3.7 million at December 31, 2010. Based on the general reserves established on loans collectively evaluated for impairment and the specific reserves for loans individually evaluated for impairment, the Company recorded a provision for loan losses of $266 thousand in the second quarter of 2011 compared to $3.3 million in the same quarter of 2010. Based on this evaluation, the percentage of the allowance for loan losses to total loans was 1.69% at June 30, 2011 and 1.98% at December 31, 2010.

Liquidity

Liquidity represents the ability to meet present and future financial obligations through either the sale or maturity of existing assets or with borrowings from correspondent banks or other deposit markets. Liquid assets include cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, investment securities and loans maturing within one year. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ borrowing needs.

At June 30, 2011, cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, loans maturing within one year, and expected maturities, calls and principal repayments from the securities portfolio within one year totaled $33.0 million. At June 30, 2011, 23% or $58.0 million of the loan portfolio would mature within one year. At June 30, 2011, non-deposit sources of available funds totaled $30.8 million, which included $11.6 million immediately available from FHLB. During the first six months of 2011, other borrowing activity included a principal pay down of $2.4 million of FHLB borrowings compared to $2.7 million during the same period last year.

Capital Requirements

The maintenance of appropriate levels of capital is a priority and is continually monitored. Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Quantitative measures established by regulations to ensure capital adequacy require the Company to maintain minimum capital ratios. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. The following are the Company’s and Bank’s capital ratios:

 

(in thousands except for percentages)    Actual     Minimum
Capital
Requirement
   

Minimum

To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

June 30, 2011

               

Total Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 34,241         13.0 %   $ 21,070         8.0 %     N/A         N/A   

HomeTown Bank

   $ 31,918         12.1 %   $ 21,070         8.0 %   $ 26,338         10.0 %

Tier I Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 30,936         11.7 %   $ 10,535         4.0 %     N/A         N/A   

HomeTown Bank

   $ 28,613         10.9 %   $ 10,535         4.0 %   $ 15,803         6.0 %

Tier I Capital (to Average Assets)

               

Consolidated

   $ 30,936         8.7 %   $ 14,322         4.0 %     N/A         N/A   

HomeTown Bank

   $ 28,613         8.0 %   $ 14,322         4.0 %   $ 17,903         5.0 %

 

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Financial Instruments With Off-Balance-Sheet Risk

In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance-sheet risk. These financial instruments involve commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for on-balance-sheet risk.

At June 30, 2011 outstanding commitments to extend credit including letters of credit were $40.0 million. There are no commitments to extend credit on impaired loans.

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash outlays for the Company.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

 

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In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its (consolidated) financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its (consolidated) financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its (consolidated) financial statements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures, the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e) and 15d-15(e), were effective to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II   OTHER INFORMATION

 

Item 1. Legal Proceedings.

In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

 

Item 1A. Risk Factors.

Not applicable to smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

 

Item 3. Defaults Upon Senior Securities.

None

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

None

 

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Item 6. Exhibits

(a) Exhibits

 

Exhibit
No.

     
31.1    Certification of Chief Executive of Officer (302 Certification).
31.2    Certification of Chief Financial Officer (302 Certification).
32    Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).
101*    Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2011, and 2010; (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

HOMETOWN BANK    
Date: August 12, 2011   By:  

/S/    SUSAN K. STILL        

    Susan K. Still
    President
    Chief Executive Officer
Date: August 12, 2011   By:  

/S/    CHARLES W. MANESS, JR.        

    Charles W. Maness, Jr.
    Executive Vice President
    Chief Financial Officer

 

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HOMETOWN BANK

FORM 10Q

INDEX TO EXHIBITS

 

Exhibit

  

Description

31.1    Certification of Chief Executive of Officer (302 Certification).
31.2    Certification of Chief Financial Officer (302 Certification).
32    Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).
101*    Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2011, and 2010; (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.