HomeTown Bankshares Corp - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - HomeTown Bankshares Corp	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - HomeTown Bankshares Corp	ex31-2.htm
EX-32 - EXHIBIT 32 - HomeTown Bankshares Corp	ex32.htm
EXCEL - IDEA: XBRL DOCUMENT - HomeTown Bankshares Corp	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended March 31, 2015.

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

for the transition period from to .

Commission File 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 ☒ 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 ☒ 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	☒

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

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

As of May 14, 2015, 3,296,237 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX

PART I. FINANCIAL INFORMATION


Item 1.	FINANCIAL STATEMENTS

Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014		3

Consolidated Statements of Income for the Three Months Ended March 31, 2015 and 2014		4

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014		5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014		6

Notes to Consolidated Financial Statements		7

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27

Item 4.	CONTROLS AND PROCEDURES	27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosure	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

SIGNATURES		29

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

HomeTown Bankshares Corporation

Consolidated Balance Sheets

March 31, 2015 and December 31, 2014

Dollars In Thousands, Except Share and Per Share Data	March 31, 2015			December 31, 2014
Assets	(Unaudited)
Cash and due from banks	$	14,955		$	13,795
Federal funds sold		1,370			649
Securities available for sale, at fair value		51,158			54,603
Restricted equity securities, at cost		2,680			2,476
Loans held for sale		539			242
Loans, net of allowance for loan losses of $3,329 in 2015 and $3,332 in 2014		336,028			328,347
Property and equipment, net		14,901			14,900
Other real estate owned, net of valuation allowance of $422 in 2015 and 2014		6,917			6,986
Bank owned life insurance		6,150			3,622
Accrued income		1,988			1,924
Other assets		683			665
Total assets	$	437,369		$	428,209

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	52,882		$	51,226
Interest-bearing		313,713			311,369
Total deposits		366,595			362,595
Short term borrowings		814			422
Federal Home Loan Bank borrowings		24,000			20,000
Accrued interest payable		303			272
Other liabilities		1,322			1,695
Total liabilities		393,034			384,984

Commitments and contingencies	–			–

Stockholders’ equity:
Convertible preferred stock, no par value; Series C 20,000 shares authorized, 14,000 issued and outstanding at March 31, 2015 and at December 31, 2014		13,293			13,293
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,296,237 (includes 35,549 restricted shares) at March 31, 2015 and 3,287,567 (includes 37,727 restricted shares) at December 31, 2014		16,481			16,438
Surplus		15,300			15,310
Retained deficit		(1,705	)		(2,271	)
Accumulated other comprehensive income		635			455
Total HomeTown Bankshares Corporation stockholders’ equity		44,004			43,225
Non-controlling interest in consolidated subsidiary		331		–
Total stockholders’ equity		44,335			43,225
Total liabilities and stockholders’ equity	$	437,369		$	428,209

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the three months ended March 31, 2015 and 2014

Dollars In Thousands, Except Share and Per Share Data	2015		2014
Interest and dividend income:	(Unaudited)		(Unaudited)
Loans and fees on loans	$	3,899	$	3,695
Taxable investment securities		206		263
Nontaxable investment securities		103		94
Dividends on restricted stock		33		32
Other interest income		9		9
Total interest and dividend income		4,250		4,093
Interest expense:
Deposits		448		440
Other borrowed funds		92		94
Total interest expense		540		534
Net interest income		3,710		3,559
Provision for loan losses	–			70
Net interest income after provision for loan losses		3,710		3,489

Noninterest income:
Service charges on deposit accounts		110		91
ATM and interchange income		122		94
Mortgage loan brokerage fees		120		30
Gains on sales of investment securities		40		−
Other income		143		118
Total noninterest income		535		333

Noninterest expense:
Salaries and employee benefits		1,541		1,412
Occupancy and equipment expense		445		366
Data processing expense		212		175
Advertising and marketing expense		242		103
Professional fees		112		73
Bank franchise taxes		66		51
FDIC insurance expense		75		44
Gains on sales and writedowns of other real estate owned, net		−		(5	)
Other real estate owned expense		30		64
Directors’ fees		52		51
Other expense		334		323
Total noninterest expense		3,109		2,657
Net income before income taxes		1,136		1,165
Income tax expense		346		362
Net income		790		803
Less net income attributable to non-controlling interest		14		−
Net income attributable to HomeTown Bankshares Corporation		776		803
Effective dividends on preferred stock		210		210
Net income available to common stockholders	$	566	$	593
Basic earnings per common share	$	0.17	$	0.18
Diluted earnings per common share	$	0.14	$	0.15
Weighted average common shares outstanding		3,291,517		3,276,631
Diluted weighted average common shares outstanding		5,531,517		5,516,631

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2015 and 2014

	2015			2014
Dollars In Thousands	(Unaudited)			(Unaudited)
Net income	$	790		$	803

Other comprehensive income:
Net unrealized holding gains on securities available for sale during the period		312			782
Deferred income tax expense on unrealized holding gains on securities available for sale		(106	)		(265	)
Reclassification adjustment for gains on sales of investment securities included in net income		(40	)		−
Tax expense related to realized gains on securities sold		14			−
Total other comprehensive income		180			517
Comprehensive income	$	970		$	1,320

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the three months ended March 31, 2015 and 2014

Dollars in Thousands	2015			2014
Cash flows from operating activities:	(Unaudited)			(Unaudited)
Net income	$	790		$	803
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		185			155
Provision for loan losses	–				70
Amortization of premium on securities, net		145			153
Gains on sales and writedowns of other real estate, net	–				(5	)
Gains on sales of investment securities		(40	)	–
Increase in value of life insurance contracts		(28	)		(25	)
Stock compensation expense		33			11
Changes in assets and liabilities:
Loans held for sale		(297	)		(509	)
Accrued income		(64	)		(22	)
Other assets		(18	)		(18	)
Deferred taxes, net		(92	)		325
Accrued interest payable		31			(15	)
Other liabilities		(373	)		582
Net cash flows provided by operating activities		272			1,505
Cash flows used in investing activities:
Net (increase) decrease in federal funds sold		(721	)		240
Purchases of investment securities available for sale		(1,748	)		(503	)
Sales, maturities, and calls of available for sale securities		5,360			1,704
(Purchase) redemption of restricted equity securities, net		(204	)		201
Net increase in loans		(7,681	)		(13,846	)
Proceeds from sales of other real estate		69			973
Purchases of bank owned life insurance		(2,500	)	–
Purchases of property and equipment		(186	)		(435	)
Net cash flows used in investing activities		(7,611	)		(11,666	)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits		1,656			(1,344	)
Net increase in interest-bearing deposits		2,344			10,219
Net increase in short-term borrowings		392			743
Net increase (decrease) in FHLB borrowings		4,000			(3,000	)
Net increase in equity of noncontrolling interest		317			–
Preferred stock dividend payment		(210	)		(210	)
Net cash flows provided by financing activities		8,499			6,408
Net increase (decrease) in cash and cash equivalents		1,160			(3,753	)
Cash and cash equivalents, beginning		13,795			19,537
Cash and cash equivalents, ending	$	14,955		$	15,784
Supplemental disclosure of cash flow information:
Cash payments for interest	$	509		$	549
Cash payments for income taxes	$	646		$	17
Supplemental disclosure of noncash investing activities:
Change in unrealized gains on available for sale securities	$	272		$	782

See Notes to Consolidated Financial Statements

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 Company 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, 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 March 31, 2015 and for the periods ended March 31, 2015 and 2014 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

Management believes that all interim adjustments for the period ended March 31, 2015 are of a normal recurring nature. 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. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2014, included in the Company’s Form 10-K for the year ended December 31, 2014. Interim financial performance is not necessarily indicative of performance for the full year.

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 of HomeTown Bankshares Corporation include the accounts of its wholly-owned subsidiary HomeTown Bank and the accounts of its subsidiary, HomeTown Residential Mortgage LLC. HomeTown Bank owns a 49% interest in HomeTown Residential Mortgage LLC which originates and sells mortgages secured by personal residences. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

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 Form 10-K for these policies.

Note 2. Investment Securities

The amortized cost and fair value of available-for-sale securities as of March 31, 2015 and December 31, 2014, are as follows:

(Dollars In Thousands)	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	24,678	$	373	$	(84	)	$	24,967
Mortgage-backed securities		8,734		120		(43	)		8,811
Municipal securities		16,784		610		(14	)		17,380
	$	50,196	$	1,103	$	(141	)	$	51,158

(Dollars In Thousands)	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	26,812	$	333	$	(180	)	$	26,965
Mortgage-backed securities		9,678		125		(64	)		9,739
Municipal securities		17,423		531		(55	)		17,899
	$	53,913	$	989	$	(299	)	$	54,603

U. S. Government and federal agency securities: The unrealized losses on 15 of the Company’s investments in obligations of the U. S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

Mortgage-backed securities: The unrealized losses on 9 of the Company’s investments in government-sponsored entity mortgage-backed securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

Municipal securities: The unrealized losses on 4 of the Company’s investments in municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates, credit spreads, ratings and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

The following tables demonstrate the unrealized loss position of available-for-sale securities at March 31, 2015 and December 31, 2014. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

	March 31, 2015
	Less than 12 months					12 months or more					Total
(Dollars In Thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U. S. Government agency securities	$	2,980	$	(8	)	$	5,531	$	(76	)	$	8,511	$	(84	)
Mortgage-backed securities		1,297		(9	)		2,630		(34	)		3,927		(43	)
Municipal securities		1,282		(14	)		−		−			1,282		(14	)
	$	5,559	$	(31	)	$	8,161	$	(110	)	$	13,720	$	(141	)

	December 31, 2014
	Less than 12 months					12 months or more					Total
(Dollars In Thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agency securities	$	5,568	$	(48	)	$	7,078	$	(132	)	$	12,646	$	(180	)
Mortgage-backed securities		742		(6	)		4,058		(58	)		4,800		(64	)
Municipal securities		1,625		(20	)		2,186		(35	)		3,811		(55	)
	$	7,935	$	(74	)	$	13,322	$	(225	)	$	21,257	$	(299	)

There are 28 debt securities with fair values totaling $13.7 million considered temporarily impaired at March 31, 2015. As of March 31, 2015, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

The Company realized gains of $40 thousand on sales of securities in the first three months of 2015. The Company did not recognize any gains or losses during the same period last year.

The amortized cost and fair values of investment securities available for sale at March 31, 2015, by contractual maturity are as follows:

(Dollars In Thousands)	Amortized Cost		Fair Value
One year or less	$	126	$	127
Over one through five years		683		695
Over five through ten years		7,935		8,021
Greater than 10 years		41,452		42,315
	$	50,196	$	51,158

Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at March 31, 2015 and December 31, 2014 were as follows:

(Dollars In Thousands)	March 31, 2015			December 31, 2014
Construction loans:
Residential	$	10,353		$	10,019
Land acquisition, development & commercial		23,402			23,686
Real estate:
Residential		93,346			86,269
Commercial		133,956			135,070
Commercial, industrial & agricultural		44,722			44,807
Equity lines		26,275			24,330
Consumer		7,303			7,498
Total		339,357			331,679
Less allowance for loan losses		(3,329	)		(3,332	)
Loans, net	$	336,028		$	328,347

The past due and nonaccrual status of loans as of March 31, 2015 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 loans:
Residential	$	−	$	−	$	−	$	−	$	10,353	$	10,353	$	−
Land acquisition, development & commercial		−		−		−		−		23,402		23,402		−
Real estate:
Residential		−		788		167		955		92,391		93,346		379
Commercial		152		−		3		155		133,801		133,956		996
Commercial, industrial & agricultural		−		−		−		−		44,722		44,722		12
Equity lines		191		5		−		196		26,079		26,275		−
Consumer		1		35		−		36		7,267		7,303		19
Total	$	344	$	828	$	170	$	1,342	$	338,015	$	339,357	$	1,406

The past due and nonaccrual status of loans as of December 31, 2014 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 loans:
Residential	$	−	$	−	$	−	$	−	$	10,019	$	10,019	$	−
Land acquisition, development & commercial		−		−		−		−		23,686		23,686		−
Real estate:
Residential		−		381		261		642		85,627		86,269		475
Commercial		−		85		−		85		134,985		135,070		758
Commercial, industrial & agricultural		96		−		−		96		44,711		44,807		−
Equity lines		105		−		−		105		24,225		24,330		−
Consumer		10		36		−		46		7,452		7,498		21
Total	$	211	$	502	$	261	$	974	$	330,705	$	331,679	$	1,254

There was one loan of $2 thousand that was past due ninety days or more and still accruing interest as of March 31, 2015. There were no loans that were past due ninety days or more and still accruing interest at December 31, 2014.

Impaired loans, which include TDR’s of $6.9 million, and the related allowance at March 31, 2015, were as follows:

March 31, 2015

With no related allowance:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

262

−

264

Commercial

7,702

7,878

−

7,705

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with no allowance

7,976

8,152

−

7,980

March 31, 2015

With an allowance recorded:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

−

Commercial

138

140

−

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with an allowance

138

140

−

Impaired loans, which include TDR’s of $6.7 million, and the related allowance at December 31, 2014, were as follows:

December 31, 2014

With no related allowance:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

525

700

−

605

Commercial

7,507

−

8,563

289

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with no allowance

8,032

8,207

−

9,168

301

December 31, 2014

With an allowance recorded:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

−

Commercial

141

153

−

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with an allowance

141

153

−

Troubled Debt Restructurings

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.9 million at March 31, 2015. This compares with $6.7 million in total restructured loans at December 31, 2014.

The following table presents by class of loan, information related to the loan modified in a TDR during 2015:

	Loans modified as TDR's For the three months ended March 31, 2015
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(Dollars in Thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real estate loans:
Residential		—		—		—
Commercial		1		260		255
Commercial, industrial, agricultural		—		—		12
Equity lines		—		—		—
Consumer		—		—		—
Total Loans		1	$	260	$	267

For the three months ended March 31, 2014, no loans were modified as TDR’s.

Two of the six loans totaling $6.0 million were not on nonaccrual status at March 31, 2015. The other four loans totaling $889 thousand were on nonaccrual status at the end of the first quarter of 2015. The loan restructured into two TDR’s in the first quarter of 2015 was included in substandard nonaccrual loans and impaired loans at the end of 2014. All six TDR’s were current with their restructured terms at March 31, 2015.

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, if a specific reserve is associated with the loan it may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.

Note 4. Allowance for Loan Losses

The following table presents, as of March 31, 2015, 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).

March 31, 2015	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	Beginning balance		Charge- offs			Recoveries		Provisions			Ending Balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment
Construction loans:
Residential	$	43	$	−		$	−	$	(2	)	$	41	$	−	$	41	$	10,353	$	−	$	10,353
Land acquisition, development & commercial		453		−			−		4			457		−		457		23,402		−		23,402
Real estate:
Residential		833		−			−		(8	)		825		−		825		93,346		262		93,084
Commercial		1,012		−			−		(48	)		964		138		826		133,956		7,840		126,116
Commercial, industrial & agricultural		319		−			10		32			361		−		361		44,722		12		44,710
Equity lines		423		−			−		44			467		−		467		26,275		−		26,275
Consumer		65		(15	)		2		12			64		−		64		7,303		−		7,303
Unallocated		184		−			−		(34	)		150		−		150		−		−		−
Total	$	3,332	$	(15	)	$	12	$	−		$	3,329	$	138	$	3,191	$	339,357	$	8,114	$	331,243

The following table presents, as of December 31, 2014, 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).

December 31, 2014	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	Beginning balance		Charge- offs			Recoveries		Provisions			Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment

Construction loans:
Residential	$	156	$	−		$	−	$	(113	)	$	43	$	−	$	43	$	10,019	$	−	$	10,019
Land acquisition, development & commercial		872		−			−		(419	)		453		−		453		23,686		−		23,686
Real estate:
Residential		867		(233	)		34		165			833		−		833		86,269		525		85,744
Commercial		1,008		−			−		4			1,012		141		871		135,070		7,648		127,422
Commercial, industrial & agricultural		327		(55	)		−		47			319		−		319		44,807		−		44,807
Equity lines		385		(136	)		37		137			423		−		423		24,330		−		24,330
Consumer		63		(40	)		4		38			65		−		65		7,498		−		7,498
Unallocated		43		−			−		141			184		−		184		−		−		−
Total	$	3,721	$	(464	)	$	75	$	−		$	3,332	$	141	$	3,191	$	331,679	$	8,173	$	323,506

Loans by credit quality indicators as of March 31, 2015 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,353	$	−	$	−	$	−	$	10,353
Land acquisition, development & commercial		23,390		−		12		−		23,402
Real estate loans:
Residential		88,613		4,304		50		379		93,346
Commercial		129,837		2,287		836		996		133,956
Commercial, industrial, agricultural		44,152		521		37		12		44,722
Equity lines		26,275		−		−		−		26,275
Consumer		7,284		−		−		19		7,303
Total Loans	$	329,904	$	7,112	$	935	$	1,406	$	339,357

Loans by credit quality indicators as of December 31, 2014 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,019	$	−	$	−	$	−	$	10,019
Land acquisition, development & commercial		23,672		−		14		−		23,686
Real estate loans:
Residential		81,409		4,335		50		475		86,269
Commercial		131,087		2,302		923		758		135,070
Commercial, industrial, agricultural		44,248		521		38		−		44,807
Equity lines		24,330		−		−		−		24,330
Consumer		7,475		−		2		21		7,498
Total Loans	$	322,240	$	7,158	$	1,027	$	1,254	$	331,679

At March 31, 2015 and December 31, 2014, the Company had no loans classified as Doubtful or Loss.

Note 5. Foreclosed Properties

Changes in foreclosed properties for the three months ended March 31, 2015 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	7,408		$	(422	)	$	6,986
Additions		—			—			—
Writedowns		—			—			—
Sales		(69	)		—			(69	)
Balance at the end of the period	$	7,339		$	(422	)	$	6,917

Changes in foreclosed properties for the three months ended March 31, 2014 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	9,078		$	(935	)	$	8,143
Additions		—			—			—
Writedowns		—			—			—
Sales		(1,390	)		422			(968	)
Balance at the end of the period	$	7,688		$	(513	)	$	7,175

The major classifications of other real estate owned in the consolidated balance sheets at March 31, 2015 and December 31, 2014 were as follows:

(Dollars In Thousands)	March 31, 2015		December 31, 2014
Residential lots	$	2,954	$	3,023
Residential development		423		423
Commercial lots		1,076		1,076
Commercial buildings		2,464		2,464
Total Other Real Estate Owned	$	6,917	$	6,986

There were no residential real estate loans in the process of foreclosure at March 31, 2015 or December 31, 2014.

Other real estate owned related expenses in the consolidated statements of income for the three months ended March 31, 2015 and March 31, 2014 include:

(Dollars In Thousands)	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Net gain on sales	$	—	$	(5	)
Provision for unrealized losses		—		—
Operating expenses		30		64
Total Other Real Estate Owned	$	30	$	59

Note 6. Stock Based Compensation

The Company recorded stock based compensation expense of $33 thousand and $11 thousand for the years to date March 31, 2015 and 2014, respectively.

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors may grant stock options to directors, officers and employees. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. On December 18, 2014, the Board of Directors granted 165 thousand shares which will vest over a five year period. Financial assumptions and variables used to determine the fair value of these stock options are; risk free interest rate of 2.01%, an expected term of 7.5 years, an expected stock price volatility of 26% and a dividend rate of 0%. The fair value of the options was determined to be $2.29 per option. Compensation expense will be charged to income ratably over the vesting period and was $18 thousand year to date March 31, 2015. As of March 31, 2015 there was $357 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 4.76 years. No options were granted during the three months ended March 31, 2015. All previously issued options were fully vested at the end of 2012.

A summary of option activity under the 2005 stock option plan year to date March 31, 2015 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2014		549,560		$	8.61
Granted		-			-
Exercised		-			-
Forfeited		(3,100	)		7.76
Balance at March 31, 2015		546,460		$	8.62	$	-		3.81
Exercisable at March 31, 2015		383,460		$	9.35	$	-		1.29

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2015.

In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five year period and compensation expense is charged to income ratably over the vesting period and was $15 thousand and $11 thousand for the years to date March 31, 2015 and 2014, respectively. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The Company granted 8,670 and 17,268 shares of restricted stock under the plan during the years to date March 31, 2015 and 2014, respectively. The weighted-average grant date fair value of restricted stock granted in 2015 was $7.70 compared to $6.25 in 2014.

As of March 31, 2015, there was $211 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2020. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	For the three months ended March 31, 2015					For the three months ended March 31, 2014
	Shares			Weighted-Average Grant Date Fair Value		Shares			Weighted-Average Grant Date Fair Value
Nonvested at beginning of year		37,727		$	5.56		27,846		$	5.05
Granted		8,670			7.70		17,268			6.25
Vested		(10,848	)		5.56		(7,387	)		5.23
Cancelled	–			–		–			–
Nonvested at the end of the period		35,549		$	6.08		37,727		$	5.56

Note 7. 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.

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 consolidated 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 consider observable market data (Level 2).

Bank owned life insurance: The carrying value amounts of bank owned life insurance approximate fair value.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

(Dollars In Thousands)			Carrying value at March 31, 2015
Description	Balance as of March 31, 2015		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	$	24,967	–	$	24,967	–
Mortgaged-backed securities		8,811	–		8,811	–
Municipal securities		17,380	–		17,380	–

Bank owned life insurance		6,150	–		6,150	–

(Dollars In Thousands)			Carrying value at December 31, 2014
Description	Balance as of December 31, 2014		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	$	26,965	–	$	26,965	–
Mortgaged-backed securities		9,739	–		9,739	–
Municipal securities		17,899	–		17,899	–

Bank owned life insurance		3,622	–		3,622	–

Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs 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 consolidated financial statements:

Impaired Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and a specific reserve is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the extent of any loss. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraisal value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s consolidated joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.

Other Real Estate Owned (OREO): The carrying amount of real estate owned by the Company resulting from foreclosures is estimated at the lesser of cost or the fair value of the real estate based on an observable market price or a current appraised value less selling costs. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the real estate is further impaired below the appraised value or there is no observable market price, the Company records the real estate as nonrecurring Level 3.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014.

(Dollars In Thousands)				Carrying value at March 31, 2015
Description		Balance as of March 31, 2015		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	$	–		$	-	$	-	$	-
Loans held for sale			539		-		539		-
Other real estate owned			6,917		-		2,269		4,648

(Dollars In Thousands)			Carrying value at December 31, 2014
Description	Balance as of December 31, 2014		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	$	-	$	-	$	-	$	-
Loans held for sale		242		-		242		-
Other real estate owned		6,986		-		3,255		3,731

At March 31, 2015 and December 31, 2014, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2015:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for March 31, 2015
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	-	Discounted appraised value	Selling cost		6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal		94	%	-	94	%	(94%	)

Other real estate owned	$	2,443	Discounted appraised value	Selling cost		6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal		4	%	-	31	%	(15%	)

	$	2,205	Internal evaluations	Internal evaluations		0	%	-	33	%	(12%	)

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2014:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2014
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	–	Discounted appraised value	Selling cost		6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal		94	%	-	94	%	(94%	)

Other real estate owned	$	1,458	Discounted appraised value	Selling cost		6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal		4	%	-	4	%	(4%	)

	$	2,273	Internal evaluations	Internal evaluations		0	%	-	33	%	(11%	)

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 consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values. 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 contractual maturities on such time deposits.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At March 31, 2015 and December 31, 2014, management believes the carrying value of federal funds sold approximates estimated market value.

Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.

Loans receivable: For variable-rate loans that reprice 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.

Bank owned life insurance: The cash values of these policies are estimates using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

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 and individual retirement accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of contractual maturities on such time deposits.

Short term borrowings: The warehouse line of credit is a short term revolving credit facility used to fund mortgage loans originations until the underlying loan is sold. The warehouse line of credit, federal funds purchased, borrowings under repurchase agreements mature within 30 days and approximate their fair values.

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

Accrued interest: The carrying amount of accrued interest receivable and payable approximates 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015:

(Dollars In Thousands)			Fair value at March 31, 2015
Description	Carrying value as of March 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	14,955	$	13,455	$	1,520	$	-	$	14,975
Federal funds sold		1,370		1,370		-		-		1,370
Securities available-for-sale		51,158		-		51,158		-		51,158
Restricted equity securities		2,680		-		2,680		-		2,680
Loans held for sale		539		-		539		-		539
Loans, net		336,028		-		-		337,578		337,578
Bank owned life insurance		6,150		-		6,150		-		6,150
Accrued income		1,988		-		1,988		-		1,988
Financial liabilities
Total deposits		366,595		-		367,142		-		367,142
Short term borrowings		814		-		814		-		814
FHLB borrowings		24,000		-		24,345		-		24,345
Accrued interest payable		303		-		303		-		303

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2014:

(Dollars In Thousands)			Fair value at December 31, 2014
Description	Carrying value as of December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	13,795	$	11,794	$	2,012	$	-	$	13,806
Federal funds sold		649		649		-		-		649
Securities available-for-sale		54,603		-		54,603		-		54,603
Restricted equity securities		2,476		-		2,476		-		2,476
Loans held for sale		242		-		242		-		242
Loans, net		328,347		-		-		332,167		332,167
Bank owned life insurance		3,622		-		3,622		-		3,622
Accrued income		1,924		-		1,924		-		1,924
Financial liabilities
Total deposits		362,595		-		350,418		-		350,418
Short term borrowings		422		-		422		-		422
FHLB borrowings		20,000		-		20,356		-		20,356
Accrued interest payable		272		-		272		-		272

Note 8. Reclassifications Out of Other Comprehensive Income

Items reclassified in their entirety to net income for the three months ended March 31, 2015 and 2014 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Three Months Ended March 31,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2015		2014
Available for sale securities
Realized gains on sales of securities held for sale during the period	$	40	$	-	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		14		-	Income tax expense
	$	26	$	-	Net income

Note 9. Earnings per Common Share

The following tables show the weighted average number of shares used in computing earnings per common share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

	For the Three Months Ended March 31,
	2015							2014
Dollars In Thousands, except share and per share data	Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount			Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		3,291,517	$	566	$	0.17			3,276,631	$	593	$	0.18
Series C Preferred Stock Dividends				210							210
Effect of dilutive securities:
Convertible preferred stock		2,240,000		−		(0.03	)		2,240,000		−		(0.03	)
Earnings per common share, diluted		5,531,517	$	776	$	0.14			5,516,631	$	803	$	0.15

At March 31, 2015 and 2014, stock options to purchase 546,460 and 390,060 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be antidilutive. Non vested restricted shares were included in weighted average common shares outstanding for computing basic earnings per share, as the holder has voting rights and would share in a stock or cash dividend during the vesting period.

Note 10. Subsequent Events

On April 23, 2015, the Company’s Board of Directors declared a quarterly cash dividend in the amount of $15.00 per Series C convertible preferred share, payable on June 15, 2015 to preferred shareholders of record May 31, 2015.

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, 2014. 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.

Our Business

HomeTown Bankshares provides a full complement of consumer and commercial banking services to its primary service area which includes the Roanoke Valley, the New River Valley and Smith Mountain Lake. The Company serves these markets through a network of six branches, seven ATM’s, HomeTown Mortgage and HomeTown Investments. A high level of responsive and personal service coupled with local decision-making are the hallmarks of the Company’s customer oriented strategy. The Company offers 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 the town of Christiansburg, Virginia at 2950 Market Street; in Roanoke County, Virginia at the intersection of Colonial Avenue and Virginia Route 419; in the City of Roanoke, Virginia at 3521 Franklin Road; and in the City of Salem, Virginia at 852 West Main Street. HomeTown Bank, with a 49% interest in the joint venture HomeTown Residential Mortgage, LLC, operates a dedicated mortgage office on Colonial Ave., next to the existing branch.

HomeTown Investments provides diverse investment products and financial advisory services to existing and prospective customers. These products and services provide another source of revenue for the Company. Investment and insurance products and services are offered through an unaffiliated entity Infinex Investments, Inc., Member FINRA/SIPC. HomeTown Investments is a subsidiary of the Bank. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.

Due to limited available space at the downtown office and continued growth of the Company, Management recognized the need for an Operations Center that would provide ample space for current and future expansion. The Bank owned an office building, through foreclosure, at 4633 Brambleton Avenue in Roanoke that was converted to a secure Operations Center. At the end of 2014, the Board of Directors approved the Bank’s use of the property, and it was reclassed from other real estate owned to property and equipment. Beginning in December and through the first quarter, 23 employees have relocated to the facility.

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, 2014. 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 the Company’s historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and economic trends. These are generally grouped by homogeneous loan pools. Allowances for impaired loans are generally determined based on collateral values less cost to sell, 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.

Discussion of Operations

Three Months Ended March 31, 2015

Net income attributable to HomeTown Bankshares was $776 thousand for the first quarter of 2015 compared to $803 thousand for the same quarter last year. The lower earnings were primarily the result of accelerated marketing expenses incurred to take advantage of competitive opportunities in the local banking market. On June 30, 2014, HomeTrust Bancshares, headquartered in Asheville, N.C., entered the Roanoke market by opening a commercial loan production office in Roanoke, and in the second half of 2014 by buying all of the Bank of America branches in the Roanoke and New River Valleys. In November 2014, Valley Bank announced its sale to the Bank of North Carolina with an anticipated closing in mid-2015. When the sale of Valley Bank is consummated, HomeTown Bank will become the largest community bank headquartered in the Roanoke Valley.

Net interest income for the three months ended March 31, 2015 totaled $3.7 million and was $151 thousand or 4.2% higher than the same period in the prior year. The expansion of the loan portfolio fueled the increase. Average loans for the quarter were $335 million, up $9.3 million or 2.9% over the prior quarter, and $31.3 million or 10.3% over the same quarter a year ago. Deposits funded most of the expansion of the loan portfolio. Average deposits for the first quarter of 2015 totaled $364 million, an increase of $6.9 million over the average for the previous quarter, and $24.5 million over the same quarter in 2014. A strategic reduction of the investment portfolio and Federal Home Loan Bank advances funded the remainder of the growth in loans.

The net interest margin was 3.84%, 3.91%, and 3.94% for the three months ended March 31, 2015, December 31, 2014, and March 31, 2014, respectively. The squeeze in the margin is due to a drop in the yield on earning assets, primarily the yield on loans. The earning asset yield was 4.39% for the first quarter of 2015, five basis points below the previous quarter and 14 basis points below the same quarter in 2014. At the same time the cost of funds rose one basis point over the last quarter of 2014 and decreased four basis points when compared to the first quarter of 2014. Competition has driven rates on new loans and renewals downward in the continuing low interest rate environment. There were a few downward adjustments of interest bearing deposit rates in 2014. However, rates rose 2 basis points during the first quarter of 2015 compared to the last quarter of 2014. During the last quarter of 2014, the Company offered a competitive 27 month CD with a rate of 1.245% which helped stem the out flow from maturing CD’s and attracted additional funding.

The Federal Reserve has not raised interest rates since 2006. At the April 29, 2015 meeting, the Federal Open Market Committee (FOMC) reaffirmed that to support continued progress toward maximum employment and price stability, current fed funds rates were appropriate. The Committee said their information “…suggests that economic growth had slowed during the winter months.” The consensus of economists is that the Federal Reserve will not raise short term interest rates until September, at the earliest. Further, the Company expects the Federal Reserve to raise rates in a gradual and measured manner. The expectation is that they would raise rates 25 basis points at one or two FOMC meetings and then pause before the next hike to assess the impact on economic growth and inflation.

No provision for loan losses was recorded in the first three months of 2015 compared to $70 thousand for the same period last year. See discussion under Allowance for Loan Losses for additional information.

Noninterest income totaled $535 thousand for the first three months of 2015, up $202 thousand or 60.7% from the same period last year. Growth in the number of core deposit accounts resulted in increased service charge income on deposit accounts, and ATM and interchange income. In total these items were up $47 thousand over last year. Mortgage loan brokerage fees were $90 thousand higher than the prior year, due in part to the resurgence in lending that began in the latter half of 2014 and continued in 2015. The Roanoke Valley Association of Realtors reported 859 homes sold in the first quarter of 2015 compared to 789 for the same period last year. An unexpected drop in long term interest rates the first quarter of 2015 caused the pace of mortgage refinancing to increase significantly during the first three months of 2015. Other income was $25 thousand higher for the first three months of 2015 compared to the same period last year, due to rental income received from a tenant in the building housing the Company’s Operations Center. The Company moved some departments into the Operations Center at the end of 2014. The tenant is expected to move out in the second quarter and the Company expects to utilize the vacated space.

Year to date March 31, 2015, noninterest expense was $3.1 million, $452 thousand or 17.0% more than the $2.7 million recorded in the same period last year. Salaries and employee benefits through March 31, 2015 were $1.5 million compared to $1.4 million last year. The $129 thousand or 9.1% increase was due to several factors. The new Salem branch opened for business on July 28, 2014. Staffing of the new Salem branch accounted for $47 thousand of the increase for the current year over the prior year. The remainder of the increase in salaries reflects annual cost of living and merit pay increases, higher mortgage related commissions, and higher stock compensation expense in the current year. Occupancy and equipment expense totaled $445 thousand through March 31, 2015, an increase of $79 thousand or 21.6% over last year. Expansion of operations accounted for much of the increase. The Salem branch accounted for $30.7 thousand, and the Operations Center accounted for $16.9 thousand of the increase. As previously mentioned , in order to capitalize on opportunities created primarily by the sale of Valley Bank, advertising and marketing costs were $139 thousand higher in the first three months of 2015 as compared to the first three months of 2014. Data processing expense, professional fees, bank franchise taxes and FDIC insurance also contributed to higher expense during the first three months of 2015 compared to last year. Other real estate owned expenses were $34 thousand less for the first three months of 2015 compared to last year.

Financial Condition

The Company’s management, under the direction of the Asset/Liability Committee (ALCO) of the Board of Directors, reviews the mix of monetary assets and liabilities to ensure the Company maintains an adequate level of liquidity while maximizing interest rate spreads.

At March 31, 2015, the Company had total assets of $437 million, up $9.2 million or 2.1% over total assets of $428 million at December 31, 2014. At the end of the first quarter of 2015, net loans had increased $7.7 million or 2.3% over year end 2014.

The Company’s liabilities at March 31, 2015 totaled $393 million compared to $385 million at December 31, 2014, an increase of $8.1 million or 2.1%. Deposits accounted for half of the increase and FHLB borrowings the other half.

At March 31, 2015 and December 31, 2014, the Company had stockholders’ equity of $44.3 million and $43.2 million, respectively, an increase of $1.1 million or 2.6%. The change in stockholders’ equity in the first three months of 2015 was mainly the result of net income.

Non-performing Assets

Non-performing assets consist of nonaccrual loans, restructured loans, and repossessed and foreclosed assets.

(Dollars in thousands)	March 31, 2015		December 31, 2014
Real Estate:
Construction and land development	$	—	$	—
Residential 1-4 families		379		475
Commercial real estate		996		758
Commercial loans		12		—
Equity lines		−		—
Loans to individuals		19		21
Total nonperforming loans		1,406		1,254
Other real estate owned		6,917		6,986
Total nonperforming assets, excluding performing restructured loans		8,323		8,240
Performing restructured loans		6,011		6,052
Total nonperforming assets, including restructured loans	$	14,334	$	14,292

During the three months ended March 31, 2015, there were $174 thousand of additions to nonperforming loans, of which one loan for $167 thousand paid off in full subsequent to quarter end. During the first quarter of 2015, payments of $22 thousand were received, reducing the principal balance outstanding of loans classified as nonaccrual at the end of 2014.

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.9 million at March 31, 2015. Two of the six loans were performing in accordance with their restructured terms and were not on nonaccrual status. The loan restructured into two TDR’s was included in nonaccrual loans at March 31, 2015 and December 31, 2014. For the three months ended March 31, 2014, no loans were modified in a TDR.

The major classifications of other real estate owned in the consolidated balance sheets at March 31, 2015 and December 31, 2014 are included in Note 5, and the activity in other real estate owned for the first three months of 2015 and 2014 is also included in Note 5.

No gains or losses on sales of other real estate were recorded in the first quarter of 2015. Gains on sales of other real estate owned totaled $5 thousand for the first quarter of 2014. There were no writedowns of other real estate owned during the first three months of 2015 or 2014.

Allowance for Loan Losses

The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. The allowance consists of three components: specific, general, and unallocated. Their adequacy is evaluated separately. 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. Based on the Company’s allowance for loan losses calculation and analysis at the end of the first quarter of 2015, no provision was recorded.

Specific reserves are determined on a loan by loan basis and relate to loans classified as impaired. Management classifies loans as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Included in potentially impaired loan category are current “watch list” credits plus any additional credits which have been past due three or more times within the past 12-month period. Management individually reviews these potentially impaired loans based on generally accepted accounting principles (GAAP) related to receivables and makes a determination if the loan in fact is impaired. Management does not consider a loan impaired during a period of delay in payment if management expects the ultimate collection of all amounts due. If a loan is found to be impaired, an allowance is established when the collateral value less estimated cost to dispose, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. Specific reserves for loans individually evaluated for impairment totaled $138 thousand and $141 thousand at March 31, 2015 and December 31, 2014, respectively. Impaired loans totaled $8.1 million and $8.2 million at March 31, 2015 and December 31, 2014, respectively.

The percentage of the allowance for loan losses to total loans was 0.98%, and 1.00% at March 31, 2015, and December 31, 2014, respectively. Unallocated reserves were $150 thousand at March 31, 2015 and $184 thousand at December 31, 2014. Some surplus or unallocated reserve is desirable given the inherent weakness in this type of predictive analysis. The major indicators of loan quality have continue to be favorable. Net charges offs continued to be relatively low and as a percent of average loans were 0.00% for the first quarter of 2015. Net charge offs as a percent of average loans were 0.12% for the year 2014. Nonperforming loans were 0.41% and 0.38% of total loans at the end of the first quarter of 2015 and at the end of 2014, respectively. The allowance for loan losses to nonaccrual loans was well over 200% at March 31, 2015 and December 31, 2014.

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. Liquid assets include cash, federal funds sold, securities classified as available for sale as well as loans and securities 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 the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s management, under the direction of the Asset/Liability Committee of the Board of Directors, reviews the mix of monetary assets and liabilities to ensure the Company maintains an adequate level of liquidity at all times. This ensures that the Company’s sources of funds, primarily net fluctuations in customer deposits, investment securities and correspondent banking relationships, must be balanced with the Company’s obligations, commitments, and operational requirements, to maintain overall liquidity in conjunction with the maximization of interest rate spreads.

The Company’s asset based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $55.7 million at March 31, 2015, compared to $56.8 million at December 31, 2014, and $60.5 million at March 31, 2014. Liquidity declined and may decline further if the expansion of the loan portfolio continues to outpace deposit growth.

The Company’s primary source of funding is its retail deposit base. The Company aggressively markets in its trade area and seeks demand deposits through service-related tactics and savings deposits through competitive pricing tactics. If this funding source is not attractive either for reasons of maturity or pricing, alternative funding sources include Federal Home Loan Bank (FHLB) advances, brokered deposits, fed funds purchased and guidance lines of credit. The Company is approved to borrow 20% of our total assets from the FHLB subject to providing qualifying collateral. At March 31, 2015, the Company had borrowed $24.0 million of the $35.2 million of lendable collateral value, leaving $11.2 million of unused credit immediately available. The Company also has an $8 million guidance line of credit to borrow against securities. The limit on this line is 15% of assets. In addition, the Company had $18.5 million of fed funds lines of credit available at March 31, 2015. At March 31, 2015, there were no advances outstanding on the fed funds or guidance lines.

Capital

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. In July 2013, the Federal Reserve Bank issued revised final rules that made technical changes to its market risk capital rules to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final new capital rules required the Bank to comply with the following new minimum capital ratios, effective January 1, 2015: (1) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the previous requirement of 4%); (3) a total capital ratio of 8% of risk-weighted assets (unchanged from current requirement); and, (4) a leverage ratio of 4% of total assets. The rule introduces the requirement of a new 2.5% capital conservation buffer, to be phased in beginning on January 1, 2016, and ending on January 1, 2019. Banking organizations without other supervisory issues that wish to distribute capital freely, such as in the payment of dividends for example, must maintain the new capital conservation buffer.

The Bank’s actual capital amounts and ratios are also presented in the following tables:

HomeTown Bank March 31, 2015	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	46,434		12.41	%	$	29,925		8.00	%	$	37,407		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)	$	43,190		11.55	%	$	16,833		4.50	%	$	24,314		6.50	%
Tier I Capital (to Risk-Weighted Assets)	$	43,205		11.55	%	$	22,444		6.00	%	$	29,925		8.00	%
Tier I Leverage (to Average Assets)	$	43,205		9.96	%	$	17,347		4.00	%	$	21,684		5.00	%

HomeTown Bank December 31, 2014	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	45,695		13.00	%	$	28,125		8.00	%	$	35,157		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)	NA		NA			NA		NA			NA		NA
Tier I Capital (to Risk-Weighted Assets)	$	42,363		12.05	%	$	14,063		4.00	%	$	21,094		6.00	%
Tier I Capital (to Average Assets)	$	42,363		10.00	%	$	16,952		4.00	%	$	21,190		5.00	%

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 March 31, 2015 outstanding commitments to extend credit including letters of credit were $81.6 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 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition”, most industry-specific guidance, and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2014-09 will have on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. The amendments in this ASU remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915, “Development Stage Entities”, from the FASB Accounting Standards Codification. In addition, this ASU adds an example disclosure and removes an exception provided to development stage entities in Topic 810, “Consolidation”, for determining whether an entity is a variable interest entity. The presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014. The revised consolidation standards are effective for annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-10 to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)”, should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The amendments in this ASU apply to creditors that hold government-guaranteed mortgage loans and is intended to eliminate the diversity in practice related to the classification of these guaranteed loans upon foreclosure. The new guidance stipulates that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if (1) the loan has a government guarantee that is not separable from the loan prior to foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the other receivable should be measured on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Entities may adopt the amendments on a prospective basis or modified retrospective basis as of the beginning of the annual period of adoption; however, the entity must apply the same method of transition as elected under ASU 2014-04. Early adoption is permitted provided the entity has already adopted ASU 2014-04. The Company is currently assessing the impact that ASU 2014-14 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

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 last fiscal quarter 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. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None

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 March 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at March 31, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three months ended March 31, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015, and 2014; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014; and (v) Notes to Consolidated 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.

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 BANKSHARES CORPORATION

Date: May 15, 2015	By:	/S/ SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer

Date: May 15, 2015	By:	/S/ CHARLES W. MANESS, JR.
		Charles W. Maness, Jr.
		Executive Vice President
		Chief Financial Officer

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 March 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at March 31, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three months ended March 31, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015, and 2014; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014; and (v) Notes to Consolidated 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.

Attached files

HomeTown Bankshares Corp Reports

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