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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 June 30, 2015.

 

Or

 

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

 

for the transition period from              to             .

 

Commission File Number: 333-158525


HOMETOWN BANKSHARES CORPORATION

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


  

  

Virginia

26-4549960

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

  

  

202 South Jefferson Street,

Roanoke, Virginia

24011

(Address of principal executive offices)

(Zip Code)

 

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

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


Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    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 August 13, 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 June 30, 2015 and December 31, 2014

1

  

  

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014

2

  

  

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

3

  

  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

4

  

  

Notes to Consolidated Financial Statements

5

  

  

  

Item 2.

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

19

  

  

  

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

  

  

  

Item 4.

CONTROLS AND PROCEDURES

29

  

PART II. OTHER INFORMATION

  

  

  

Item 1.

Legal Proceedings

30

  

  

  

Item 1A.

Risk Factors

30

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

  

  

  

Item 3.

Defaults Upon Senior Securities

30

  

  

  

Item 4.

Mine Safety Disclosure

30

  

  

  

Item 5.

Other Information

30

  

  

  

Item 6.

Exhibits

30

  

  

SIGNATURES

30

 

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

June 30, 2015 and December 31, 2014

 

Dollars In Thousands, Except Share and Per Share Data

 

June 30,

2015

   

December 31,

2014

 

Assets

 

(Unaudited)

    *  

Cash and due from banks

  $ 15,063     $ 13,795  

Federal funds sold

    797       649  

Securities available for sale, at fair value

    48,931       54,603  

Restricted equity securities, at cost

    2,695       2,476  

Loans held for sale

    382       242  

Loans, net of allowance for loan losses of $3,313 in 2015 and $3,332 in 2014

    350,762       328,347  

Property and equipment, net

    14,792       14,900  

Other real estate owned, net of valuation allowance of $422 in 2015 and 2014

    6,872       6,986  

Bank owned life insurance

    6,198       3,622  

Accrued income

    1,876       1,924  

Other assets

    978       665  

Total assets

  $ 449,346     $ 428,209  
                 

Liabilities and Stockholders’ Equity

               

Deposits:

               

Noninterest-bearing

  $ 53,730     $ 51,226  

Interest-bearing

    323,487       311,369  

Total deposits

    377,217       362,595  

Federal Home Loan Bank borrowings

    25,750       20,000  

Other borrowings

    552       422  

Accrued interest payable

    365       272  

Other liabilities

    785       1,695  

Total liabilities

    404,669       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 June 30, 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 June 30, 2015 and 3,287,567 (includes 37,727 restricted shares) at December 31, 2014

    16,481       16,438  

Surplus

    15,335       15,310  

Retained deficit

    (1,052 )     (2,271 )

Accumulated other comprehensive income

    260       455  

Total HomeTown Bankshares Corporation stockholders’ equity

    44,317       43,225  

Non-controlling interest in consolidated subsidiary

    360    

 

Total stockholders’ equity

    44,677       43,225  

Total liabilities and stockholders’ equity

  $ 449,346     $ 428,209  

 

*Derived from consolidated audited financial statements.

See Notes to Consolidated Financial Statements

 

 
1

 

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the three and six months ended June 30, 2015 and 2014

  

   

For the Three Months Ended

June 30,

   

For the Six Months Ended

June 30,

 

Dollars In Thousands, Except Share and Per Share Data

 

2015

   

2014

   

2015

   

2014

 

Interest and dividend income:

 

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Loans and fees on loans

  $ 4,047     $ 3,774     $ 7,946     $ 7,469  

Taxable investment securities

    176       267       382       530  

Nontaxable investment securities

    100       93       203       187  

Dividends on restricted stock

    35       30       68       62  

Other interest income

    9       12       18       21  

Total interest and dividend income

    4,367       4,176       8,617       8,269  

Interest expense:

                               

Deposits

    465       442       913       882  

Other borrowed funds

    102       98       194       192  

Total interest expense

    567       540       1,107       1,074  

Net interest income

    3,800       3,636       7,510       7,195  

Provision for loan losses

 

      132    

      202  

Net interest income after provision for loan losses

    3,800       3,504       7,510       6,993  
                                 

Noninterest income:

                               

Service charges on deposit accounts

    124       117       234       208  

ATM and interchange income

    146       109       268       203  

Mortgage banking

    258       17       378       47  

Gains on sales of investment securities

          108       40       108  

Other income

    167       155       310       273  

Total noninterest income

    695       506       1,230       839  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    1,619       1,381       3,160       2,793  

Occupancy and equipment expense

    439       364       884       730  

Data processing expense

    205       177       417       352  

Advertising and marketing expense

    167       132       409       235  

Professional fees

    111       114       223       187  

Bank franchise taxes

    65       80       131       131  

FDIC insurance expense

    84       68       159       112  

Gains on sales and writedowns of other real estate owned, net

 

   

   

      (5 )

Other real estate owned expense

    40       59       70       123  

Directors’ fees

    58       58       110       109  

Other expense

    434       364       768       687  

Total noninterest expense

    3,222       2,797       6,331       5,454  

Net income before income taxes

    1,273       1,213       2,409       2,378  

Income tax expense

    381       380       727       742  

Net income

    892       833       1,682       1,636  

Less net income attributable to non-controlling interest

    29    

      43    

 

Net income attributable to HomeTown Bankshares Corporation

    863       833       1,639       1,636  

Effective dividends on preferred stock

    210       210       420       420  

Net income available to common stockholders

  $ 653     $ 623     $ 1,219     $ 1,216  

Basic earnings per common share

  $ 0.20     $ 0.19     $ 0.37     $ 0.37  

Diluted earnings per common share

  $ 0.16     $ 0.15     $ 0.30     $ 0.30  

Weighted average common shares outstanding

    3,296,237       3,287,567       3,293,890       3,282,129  

Diluted weighted average common shares outstanding

    5,536,237       5,527,567       5,533,890       5,522,129  

 

See Notes to Consolidated Financial Statements

 

 
2

 

  

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2015 and 2014

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Dollars In Thousands

 

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Net income

  $ 892     $ 833     $ 1,682     $ 1,636  
                                 

Other comprehensive income:

                               

Net unrealized holding (losses) gains on securities available for sale during the period

    (567 )     500       (255 )     1,282  

Deferred income tax benefit (expense) on unrealized holding gains on securities available for sale

    192       (171 )     86       (436 )

Reclassification adjustment for gains on sales of investment securities included in net income

 

      (108 )     (40 )     (108 )

Tax expense related to realized gains on securities sold

 

      37       14       37  

Total other comprehensive (loss) income

    (375 )     258       (195 )     775  

Comprehensive income

    517       1,091       1,487       2,411  

Less: Comprehensive income attributable to the non-controlling interest

    29    

      43    

 

Comprehensive income attributable to HomeTown Bankshares Corporation

  $ 488     $ 1,091     $ 1,444     $ 2,411  

 

See Notes to Consolidated Financial Statements

 

 
3

 

   

 

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the six months ended June 30, 2015 and 2014

 

Dollars in Thousands

 

2015

   

2014

 

Cash flows from operating activities:

 

(Unaudited)

   

(Unaudited)

 

Net income

  $ 1,682     $ 1,636  

Adjustments to reconcile net income to net cash provided by operations:

               

Depreciation and amortization

    377       311  

Provision for loan losses

 

      202  

Amortization of premium on securities, net

    287       294  

Gains on sales of loans held for sale

    (284 )      (20

Gains on sales and writedowns of other real estate, net

 

      (5 )

Gains on sales of investment securities

    (40 )     (108 )

Increase in value of life insurance contracts

    (76 )     (51 )

Stock compensation expense

    68       26  
Originations of loans held for sale     (12,481 )     (2,437 )
Proceeds from sales of loans held for sale     12,625       2,295  

Changes in assets and liabilities:

               

Accrued income

    48       (45 )

Other assets

    (313 )     (127 )

Deferred taxes, net

    100       683  

Accrued interest payable

    93       9  

Other liabilities

    (910 )     (80 )

Net cash flows provided by operating activities

    1,176       2,583  

Cash flows used in investing activities:

               

Net (increase) decrease in federal funds sold

    (148 )     243  

Purchases of investment securities available for sale

    (1,748 )     (4,083 )

Sales, maturities, and calls of available for sale securities

    6,878       6,971  

Purchase of restricted equity securities, net

    (219 )     (154 )

Net increase in loans

    (22,415 )     (20,562 )

Proceeds from sales of other real estate

    114       974  

Purchases of bank owned life insurance

    (2,500 )  

 

Purchases of property and equipment

    (269 )     (955 )

Net cash flows used in investing activities

    (20,307 )     (17,566 )

Cash flows from financing activities:

               

Net increase (decrease) in noninterest-bearing deposits

    2,504       (2,932 )

Net increase in interest-bearing deposits

    12,118       11,595  

Net increase in FHLB borrowings

    5,750       4,000  

Net increase in other borrowings

    130       315  

Net increase in equity of non-controlling interest

    317    

 

Preferred stock dividend payment

    (420 )     (420 )

Net cash flows provided by financing activities

    20,399       12,558  

Net increase (decrease) in cash and cash equivalents

    1,268       (2,425 )

Cash and cash equivalents, beginning

    13,795       19,537  

Cash and cash equivalents, ending

  $ 15,063     $ 17,112  

Supplemental disclosure of cash flow information:

               

Cash payments for interest

  $ 1,014     $ 1,065  

Cash payments for income taxes

  $ 1,356     $ 33  

Supplemental disclosure of noncash investing activities:

               

Change in unrealized gains on available for sale securities

  $ (295 )   $ 1,174  

 

See Notes to Consolidated Financial Statements 

 

 
4

 

 

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 June 30, 2015 and for the periods ended June 30, 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 June 30, 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 June 30, 2015 and December 31, 2014, are as follows:

 

(Dollars In Thousands)

 

June 30, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

U. S. Government agency securities

  $ 23,739     $ 267     $ (127 )   $ 23,879  

Mortgage-backed securities

    8,059       89       (78 )     8,070  

Municipal securities

    16,738       376       (132 )     16,982  
    $ 48,536     $ 732     $ (337 )   $ 48,931  

 

(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  

  

 
5

 

 

U. S. Government and federal agency securities: The unrealized losses on 19 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 June 30, 2015.

 

Mortgage-backed securities: The unrealized losses on 10 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 June 30, 2015.

 

Municipal securities: The unrealized losses on 19 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 June 30, 2015.

 

The following tables demonstrate the unrealized loss position of available-for-sale securities at June 30, 2015 and December 31, 2014. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

 

   

June 30, 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

  $ 4,855     $ (36 )   $ 5,379     $ (91 )   $ 10,234     $ (127 )

Mortgage-backed securities

    1,724       (24 )     2,736       (54 )     4,460       (78 )

Municipal securities

    7,119       (132 )                 7,119       (132 )
    $ 13,698     $ (192 )   $ 8,115     $ (145 )   $ 21,813     $ (337 )

 

   

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 48 debt securities with fair values totaling $21.8 million considered temporarily impaired at June 30, 2015.  As of June 30, 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 six months of 2015. The Company realized gains of $108 thousand during the same period last year.

 

The amortized cost and fair values of investment securities available for sale at June 30, 2015, by contractual maturity are as follows:

 

(Dollars In Thousands)

 

Amortized

Cost

   

Fair

Value

 

One year or less

  $ 125     $ 126  

Over one through five years

    2,014       2,031  

Over five through ten years

    7,525       7,555  

Greater than 10 years

    38,872       39,219  
    $ 48,536     $ 48,931  

  

 
6

 

  

Note 3. Loans Receivable

 

The major classifications of loans in the consolidated balance sheets at June 30, 2015 and December 31, 2014 were as follows:

(Dollars In Thousands)

 

June 30,

2015

   

December 31,

2014

 

Construction loans:

               

Residential

  $ 10,539     $ 10,019  

Land acquisition, development & commercial

    26,521       23,686  

Real estate:

               

Residential

    97,995       86,269  

Commercial

    136,502       135,070  

Commercial, industrial & agricultural

    49,338       44,807  

Equity lines

    25,771       24,330  

Consumer

    7,409       7,498  

Total

    354,075       331,679  

Less allowance for loan losses

    (3,313 )     (3,332 )

Loans, net

  $ 350,762     $ 328,347  

  

The past due and nonaccrual status of loans as of June 30, 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

  $     $     $     $     $ 10,539     $ 10,539     $  

Land acquisition, development & commercial

                            26,521       26,521        

Real estate:

                                                       

Residential

    203             100       303       97,692       97,995        

Commercial

    800                   800       135,702       136,502       386  

Commercial, industrial & agricultural

    38                   38       49,300       49,338       12  

Equity lines

          191             191       25,580       25,771        

Consumer

          1             1       7,408       7,409        

Total

  $ 1,041     $ 192     $ 100     $ 1,333     $ 352,742     $ 354,075     $ 398  

 

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 were two loans of $100 thousand that were past due ninety days or more and still accruing interest as of June 30, 2015. There were no loans that were past due ninety days or more and still accruing interest at December 31, 2014.

 

 
7

 

 

Impaired loans, which include TDR’s of $6.8 million, and the related allowance at June 30, 2015, were as follows:

June 30, 2015

With no related allowance:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real estate:

                                       

Residential

    252       252             259       2  

Commercial

    7,621       7,621             7,684       132  

Commercial, industrial & agricultural

    12       12             12        

Equity lines

                             

Consumer

                             

Total loans with no allowance

  $ 7,885     $ 7,885     $     $ 7,955     $ 134  

  

June 30, 2015

With an allowance recorded:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real estate:

                                       

Residential

                             

Commercial

    135       135       135       138        

Commercial, industrial & agricultural

                             

Equity lines

                             

Consumer

                             

Total loans with an allowance

  $ 135     $ 135     $ 135     $ 138     $  

 

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

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real estate:

                                       

Residential

    525       700             605       12  

Commercial

    7,507       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

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real estate:

                                       

Residential

                             

Commercial

    141       141       141       153        

Commercial, industrial & agricultural

                             

Equity lines

                             

Consumer

                             

Total loans with an allowance

  $ 141     $ 141     $ 141     $ 153     $  

  

 
8

 

 

Troubled Debt Restructurings

 

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.8 million at June 30, 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 six months ended June 30, 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 six months ended June 30, 2014, no loans were modified as TDR’s.

 

Four of the six loans totaling $6.5 million were not on nonaccrual status at June 30, 2015. The other two loans totaling $262 thousand were on nonaccrual status at the end of the second quarter of 2015.  The loan restructured into two TDR’s in the six months ended June 30, 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 June 30, 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.

 

 
9

 

 

Note 4. Allowance for Loan Losses

 

The following table presents, as of June 30, 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).

 

June 30, 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     $     $     $ 20     $ 63     $     $ 63     $ 10,539     $     $ 10,539  

Land acquisition, development & commercial

    453                   (209 )     244             244       26,521             26,521  

Real estate:

                                                                               

Residential

    833                   205       1,038             1,038       97,995       252       97,743  

Commercial

    1,012                   (23 )     989       135       854       136,502       7,756       128,746  

Commercial, industrial & agricultural

    319             10       96       425             425       49,338       12       49,326  

Equity lines

    423                   (87 )     336             336       25,771             25,771  

Consumer

    65       (33 )     4       43       79             79       7,409             7,409  

Unallocated

    184                   (45 )     139             139                    

Total

  $ 3,332     $ (33 )   $ 14     $     $ 3,313     $ 135     $ 3,178     $ 354,075     $ 8,020     $ 346,055  

 

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  

  

 
10

 

 

Loans by credit quality indicators as of June 30, 2015 were as follows:

 

(Dollars In Thousands)

 

Pass

   

Special

Mention

   

Substandard

Accruing

   

Substandard Nonaccrual

   

Total

 

Construction loans:

                                       

Residential

  $ 10,539     $     $     $     $ 10,539  

Land acquisition, development & commercial

    26,510             11             26,521  

Real estate loans:

                                       

Residential

    93,468       4,274       253             97,995  

Commercial

    132,422       2,273       1,421       386       136,502  

Commercial, industrial, agricultural

    48,739       552       35       12       49,338  

Equity lines

    25,754       17                   25,771  

Consumer

    7,397             12             7,409  

Total Loans

  $ 344,829     $ 7,116     $ 1,732     $ 398     $ 354,075  

 

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 June 30, 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 six months ended June 30, 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

    (114 )           (114 )

Balance at the end of the period

  $ 7,294     $ (422 )   $ 6,872  

 

Changes in foreclosed properties for the six months ended June 30, 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

    220             220  

Writedowns

                 

Sales

    (1,391 )     422       (969 )

Balance at the end of the period

  $ 7,907     $ (513 )   $ 7,394  

 

 
11

 

  

The major classifications of other real estate owned in the consolidated balance sheets at June 30, 2015 and December 31, 2014 were as follows:

 

(Dollars In Thousands)

 

June 30, 2015

   

December 31, 2014

 

Residential lots

  $ 2,909     $ 3,023  

Residential development

    423       423  

Commercial lots

    1,076       1,076  

Commercial buildings

    2,464       2,464  

Total Other Real Estate Owned

  $ 6,872     $ 6,986  

 

There were no residential real estate loans in the process of foreclosure at June 30, 2015 or December 31, 2014.

 

Other real estate owned related expenses in the consolidated statements of income for the six

months ended June 30, 2015 and June 30, 2014 include:

 

(Dollars In Thousands)

 

Six Months Ended June 30, 2015

   

Six Months Ended June 30, 2014

 

Net gain on sales

  $     $ (5 )

Provision for unrealized losses

           

Operating expenses

    70       123  

Total Other Real Estate Owned

  $ 70     $ 118  

 

Note 6. Stock Based Compensation

 

The Company recorded stock based compensation expense of $68 thousand and $26 thousand for the years to date June 30, 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 $38 thousand year to date June 30, 2015. As of June 30, 2015 there was $338 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 4.51 years. No options were granted during the six months ended June 30, 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 June 30, 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 June 30, 2015

    546,460     $ 8.62     $       3.56  

Exercisable at June 30, 2015

    383,460     $ 9.35     $       1.04  

 

(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 June 30, 2015.

 

 
12

 

 

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 $30 thousand and $26 thousand for the years to date June 30, 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 June 30, 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 June 30, 2015, there was $195 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 six months ended June 30, 2015

   

For the six months ended June 30, 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).

 

 
13

 

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:

 

(Dollars In Thousands)

         

Carrying value at June 30, 2015

 

Description

 

Balance as of June 30,

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

  $ 23,879     $     $ 23,879     $  

Mortgaged-backed securities

    8,070             8,070        

Municipal securities

    16,982             16,982        

 

(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        

 

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.

 

 
14 

 

 

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.

 

(Dollars In Thousands)

         

Carrying value at June 30, 2015

 

Description

 

Balance as of

June 30, 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

    382             382        

Other real estate owned

    6,872             3,255       3,617  

 

(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 June 30, 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 June 30, 2015:

 

(Dollars In Thousands)

 

Quantitative information about Level 3 Fair Value Measurements for June 30, 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

  $ 1,458  

Discounted appraised value

 

Selling cost

  6% -   6%   (6%)  
             

Discount for lack of marketability and age of appraisal

  4% -   4%   (4%)  
                               
    $ 2,159  

Internal evaluations

 

Internal evaluations

  0% -   33%   (13%)  

 

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.

 

 
15

 

 

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At June 30, 2015 and December 31, 2014, management believes the carrying value of federal funds sold approximates estimated market value.

 

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).

 

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.

  

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.

 

Other 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.

 

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 June 30, 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 June 30, 2015:

 

(Dollars In Thousands)

         

Fair value at June 30, 2015

 

Description

 

Carrying value as of

June 30,

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

  $ 15,063     $ 13,563     $ 1,513     $     $ 15,076  

Federal funds sold

    797       797                   797  

Securities available-for-sale

    48,931             48,931             48,931  

Restricted equity securities

    2,695             2,695             2,695  

Loans held for sale

    382             382             382  

Loans, net

    350,762                   351,485       351,485  

Bank owned life insurance

    6,198             6,198             6,198  

Accrued income

    1,876             1,876             1,876  

Financial liabilities

                                       

Total deposits

    377,217             377,840             377,840  

FHLB borrowings

    25,750             26,050             26,050  

Other borrowings

    552             552             552  

Accrued interest payable

    365             365             365  

  

 
16

 

 

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  

FHLB borrowings

    20,000             20,356             20,356  

Other borrowings

    422             422             422  

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 and six months ended June 30, 2015 and 2014 are as follows:

 

Details about Other Comprehensive

Components

 

Amounts Reclassified from

Other Comprehensive Income

for the Three Months Ended June 30,

 

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 consider available for sale

  $     $ 108  

Gains on sales of investment securities

Tax expense related to realized gains on securities sold

          37  

Income tax expense

    $     $ 71  

Net income

 

Details about Other Comprehensive

Components

 

Amounts Reclassified from

Other Comprehensive Income

for the Six Months Ended June 30,

 

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 consider available for sale

  $ 40     $ 108  

Gains on sales of investment securities

Tax expense related to realized gains on securities sold

    14       37  

Income tax expense

    $ 26     $ 71  

Net income

  

 
17

 

 

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

June 30,

 
   

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

    3,296,237     $ 653     $ 0.20       3,287,567     $ 623     $ 0.19  

Series C Preferred Stock Dividends

            210                       210          

Effect of dilutive securities:

                                               

Convertible preferred stock

    2,240,000             (0.04 )     2,240,000             (0.04 )

Earnings per common share, diluted

    5,536,237     $ 863     $ 0.16       5,527,567     $ 833     $ 0.15  

 

 

 

   

For the Six Months Ended

June 30,

 
   

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

    3,293,890     $ 1,219     $ 0.37       3,282,129     $ 1,216     $ 0.37  

Series C Preferred Stock Dividends

            420                       420          

Effect of dilutive securities:

                                               

Convertible preferred stock

    2,240,000             (0.07 )     2,240,000             (0.07 )

Earnings per common share, diluted

    5,533,890     $ 1,639     $ 0.30       5,522,129     $ 1,636     $ 0.30  

 

At June 30, 2015 and 2014, stock options to purchase 546,460 and 384,560 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be antidilutive. Nonvested 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 July 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 September 15, 2015 to preferred shareholders of record August 31, 2015.

 

 
18

 

 

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, 2014 and through the first half of 2015, 27 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.

 

 
19

 

  

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

 

Executive Summary

 

HomeTown Bankshares reported earnings for the second quarter of 2015 and year to date June 30, 2015 that exceeded earnings for the same periods in the prior year by 3.6% and 0.2%, respectively. Favorable variances in net interest income, provision for loan losses, and noninterest income were partially negated by higher noninterest expense. Net interest income rose as the result of the expanding loan portfolio. The net interest margin declined as competition for loans kept rates relatively low. Loan growth outpaced deposit growth through June and is anticipated to slow during the remainder of 2015. Credit quality continued to improve in the second quarter of 2015, and as a result no provision for loan losses has been deemed necessary in 2015. Noninterest expense was higher than the prior year due in part to expanding operations with the opening of the Salem branch office in July 2014.

 

Three Months Ended June 30, 2015

 

Net income attributable to HomeTown Bankshares was $863 thousand for the second quarter of 2015, an increase of $30 thousand or 3.6% for the same quarter last year. Favorable variances in net interest income, provision for loan losses, and noninterest income were partially offset by an unfavorable variance in noninterest expense.

 

Net interest income for the three months ended June 30, 2015 totaled $3.8 million and was $164 thousand or 4.5% higher than the same quarter in the prior year. The expansion of the loan portfolio fueled the increase. Average loans for the quarter were $348 million, up $13.1 million over the first quarter of 2015 and up $32.8 million or 10.4% over the second quarter of 2014. Deposits funded much of the expansion of the loan portfolio. Average total deposits for the second quarter of 2015 totaled $369 million, an increase of $6.0 million over the average for the previous quarter, and $22.4 million or 6.4% over the same quarter in 2014. A strategic reduction of the investment portfolio, an increase in Federal Home Loan Bank advances, and a reduction in liquidity funded the remainder of the growth in loans in the second quarter.

 

The net interest margin was 3.80%, 3.84%, and 3.86% for the three months ended June 30, 2015, March 31, 2015, and June 30, 2014, respectively. The squeeze in the margin is due to the drop in the yield on earning assets. The earning asset yield was 4.36% for the second quarter of 2015, three basis points below the previous quarter and seven basis points below the same quarter in 2014. At the same time the cost of funds rose one basis point over the first quarter of 2015 and decreased one basis points when compared to the second quarter of 2014. Competition has driven rates on new loans and renewals downward in the continuing low interest rate environment.

 

 
20

 

 

   

For the Three Months Ended June 30, 2015

   

For the Three Months Ended June 30, 2014

 

(Dollars in thousands)

 

Average

Balance

   

Interest

Income/

Expense

   

Yield/

Rate

   

Average

Balance

   

Interest

Income/

Expense

   

Yield/

Rate

 

Assets:

                                               

Federal funds sold

  $ 1,135     $ 1       0.13

%

  $ 550     $ 1       0.22

%

Deposits in banks

    5,061       8       0.65       6,933       11       0.62  

Securities, taxable

    34,723       176       2.03       44,440       267       2.40  

Securities, nontaxable (1)

    14,662       100       4.17       12,901       93       4.36  

Restricted equity securities

    2,815       35       5.02       2,511       30       4.77  

Loans held for sale

    706       7       3.89       353       4       4.97  

Loans

    347,659       4,040       4.66       314,821       3,770       4.80  

Total earnings assets

    406,761       4,367       4.36       382,509       4,176       4.43  

Less: Allowance for loan losses

    (3,322 )                     (3,781 )                

Total non-earning assets

    41,735                       32,912                  

Total Assets

  $ 445,174                     $ 411,640                  
                                                 

Liabilities and shareholders’ equity

                                               

Interest bearing deposits:

                                               

Checking

  $ 80,269     $ 31       0.16

%

  $ 73,584     $ 36       0.19

%

Money market savings

    62,754       41       0.26       64,008       53       0.33  

Regular savings

    35,895       36       0.41       28,581       33       0.46  

Time Deposits

    137,488       357       1.04       135,929       320       0.95  

FHLB borrowings

    27,824       94       1.35       20,890       94       1.78  

Other borrowings

    1,781       8       1.78       1,427       4       1.22  

Total interest bearing liabilities

    346,011       567       0.66       324,419       540       0.67  

Non-interest bearing liabilities:

                                               

Demand deposits

    53,076                       45,013                  

Other liabilities

    1,378                       851                  

Total liabilities

    400,465                       370,283                  

Total HomeTown Bankshares Corporation stockholders’ equity

    44,365                       41,357                  

Non-controlling interest in consolidated subsidiary

    344                                    

Total Liabilities and Stockholders’ Equity

  $ 445,174       567             $ 411,640       540          

Net interest income

          $ 3,800                     $ 3,636          

Interest rate spread

                    3.70                       3.76  

Interest expense to average earning assets

                    0.56                       0.57  

Net interest margin

                    3.80

%

                    3.86

%

  

(1)    Income and yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.

 

 
21

 

 

   

Three Months Ended June 30, 2015 Compared 

to Three Months Ended June 30, 2014

 
   

Increase

   

Change Due To:

 

(Dollars in thousands)

 

(Decrease)

   

Rate

   

Volume

 

Interest income:

                       

Federal funds sold

  $     $     $  

Deposits in banks

    (3 )           (3 )

Securities, taxable

    (91 )     (36 )     (55 )

Securities, nontaxable

    7       (7 )     14  

Restricted equity securities

    5       1       4  

Loans held for sale

    3       (2 )     5  

Loans

    270       (69 )     339  

Total interest income

    191       (113 )     304  
                         

Interest expense:

                       

Interest bearing liabilities:

                       

Checking

    (5 )     (7 )     2  

Money market savings

    (12 )     (11 )     (1 )

Regular savings

    3       (4 )     7  

Time Deposits

    37       23       14  

FHLB borrowings

          (27 )     27  

Other borrowings

    4       (1 )     5  

Total interest expense

    27       (27 )     54  

Net interest income

  $ 164     $ (86 )   $ 250  

 

No provision for loan losses was recorded in the second quarter of 2015 compared to $132 thousand for the same quarter last year. See discussion under Allowance for Loan Losses for additional information.

 

Noninterest income totaled $695 thousand for the second quarter of 2015, up $189 thousand or 37.4% from the same period last year. Mortgage banking income was $241 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 (RVAR) reported 1,318 homes sold in the second quarter of 2015 compared to 1,147 for the same quarter last year. No gains were recorded from the sales of investment securities for the three months ended June 30, 2015, compared to gains of $108 thousand generated from sales of investment securities in the second quarter last year.

 

For the three months ended June 30, 2015, noninterest expense was $3.2 million, $425 thousand or 15.2% more than the $2.8 million recorded in the same quarter last year. Salaries and employee benefits for the three months ended June 30, 2015 were $1.6 million compared to $1.4 million last year. The $238 thousand or 17.2% increase was due to several factors including the expansion of operations and normal recurring merit increases. The number of full time equivalent employees was 92 and 88, at the end of the second quarter of 2015 and 2014, respectively. Occupancy and equipment expense totaled $439 thousand in the second quarter of 2015, an increase of $75 thousand or 20.6% over last year, as a result of new facilities for branches and operations added since June 30, 2014.

 

Six Months Ended June 30, 2015

 

Net income attributable to HomeTown Bankshares for the year through June 30, 2015 was $1.6 million, slightly above the earnings for the same period in 2014. Favorable variances in net interest income, provision for loan losses, and noninterest income were largely offset by an unfavorable variance in noninterest expense.

 

Net interest income for the first half of 2015 totaled $7.5 million and was $315 thousand or 4.4% higher than the same period in the prior year. The growth in earning assets was the primary source of the increase in net interest income. Average earning assets for the six months ended June 30, 2015 were $402 million, an increase of $25.3 million or 6.7% over the average for the same period of time in 2014. Total average deposits increased $23.5 million during this same time frame and funded most of the expansion in earning assets.

 

 
22

 

 

   

For the Six Months Ended June 30, 2015

   

For the Six Months Ended June 30, 2014

 

(Dollars in thousands)

 

Average

Balance

   

Interest

Income/

Expense

   

Yield/

Rate

   

Average

Balance

   

Interest

Income/

Expense

   

Yield/

Rate

 

Assets:

                                               

Federal funds sold

  $ 1,085     $ 1       0.14

%

  $ 493     $ 1       0.24

%

Deposits in banks

    5,456       17       0.62       6,735       20       0.59  

Securities, taxable

    36,367       382       2.10       44,701       530       2.37  

Securities, nontaxable (1)

    14,684       203       4.20       12,948       187       4.37  

Restricted equity securities

    2,726       68       5.02       2,474       62       4.99  

Loans held for sale

    505       10       4.00       180       4       4.90  

Loans

    341,113       7,936       4.69       309,067       7,465       4.87  

Total earnings assets

    401,936       8,617       4.37       376,598       8,269       4.48  

Less: Allowance for loan losses

    (3,327 )                     (3,752 )                

Total non-earning assets

    40,847                       33,277                  

Total Assets

  $ 439,456                     $ 406,123                  
                                                 

Liabilities and shareholders’ equity

                                               

Interest bearing deposits:

                                               

Checking

  $ 81,223     $ 64       0.16

%

  $ 72,484     $ 74       0.20

%

Money market savings

    61,152       82       0.27       64,818       109       0.34  

Regular savings

    34,969       71       0.41       27,850       64       0.47  

Time Deposits

    136,863       696       1.02       133,515       635       0.96  

FHLB borrowings

    25,632       183       1.42       19,978       185       1.85  

Other borrowings

    1,347       11       1.60       1,376       7       0.94  

Total interest bearing liabilities

    341,186       1,107       0.65       320,021       1,074       0.67  

Non-interest bearing liabilities:

                                               

Demand deposits

    52,286                       44,366                  

Other liabilities

    1,733                       913                  

Total liabilities

    395,205                       365,300                  

Total HomeTown Bankshares Corporation stockholders’ equity

    44,076                       40,823                  

Non-controlling interest in consolidated subsidiary

    175                                    

Total Liabilities and Stockholders’ Equity

  $ 439,456       1,107             $ 406,123       1,074          

Net interest income

          $ 7,510                     $ 7,195          

Interest rate spread

                    3.72                       3.81  

Interest expense to average earning assets

                    0.55                       0.56  

Net interest margin

                    3.82

%

                    3.92

%

  

(1)    Income and yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.

 

 
23

 

 

   

Six Months Ended June 30, 2015 Compared

to Six Months Ended June 30, 2014

 
   

Increase

   

Change Due To:

 

(Dollars in thousands)

 

(Decrease)

   

Rate

   

Volume

 

Interest income:

                       

Federal funds sold

  $     $ (1 )   $ 1  

Deposits in banks

    (3 )     1       (4 )

Securities, taxable

    (148 )     (49 )     (99 )

Securities, nontaxable

    16       (14 )     30  

Restricted equity securities

    6             6  

Loans held for sale

    6       (2 )     8  

Loans

    471       (205 )     676  

Total interest income

    348       (270 )     618  
                         

Interest expense:

                       

Interest bearing liabilities:

                       

Checking

    (10 )     (17 )     7  

Money market savings

    (27 )     (21 )     (6 )

Regular savings

    7       (9 )     16  

Time Deposits

    61       31       30  

FHLB borrowings

    (2 )     (48 )     46  

Other borrowings

    4       (3 )     7  

Total interest expense

    33       (67 )     100  

Net interest income

  $ 315     $ (203 )   $ 518  

 

The net interest margin for the six months ended June 30, 2015 was 3.82%, compared to 3.92% for the same period in 2014. The yield on earning assets declined 11 basis points during this time. The yield on loans was 4.69% and 4.87% for the six months ended June 30, 2015 and 2014, respectively. The lower yields reflect the fact that interest rates on new and repricing loans have been less in 2015 than 2014. The July, 2015 Federal District Beige Book recognized that competition for loans had led to aggressive pricing in the Fifth District which includes Virginia. The impact of lower loan yields on overall earning assets yields was partially mitigated by changing the mix of assets - directing funds from the investment portfolio to loans which have a higher return.

 

The cost of funds dropped 2 basis points for the six months ended June 30, 2015 compared to the first half of last year. There were a few downward adjustments of interest bearing deposit rates in 2015, which was partially offset by the higher cost of time deposits. In order to provide funding for loan growth two CD promotions have been offered since June, 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. As the result of continued strong loan growth in 2015, another CD promotion was launched in the second quarter of 2015 offering a rate of 1.10% for 14 months.

 

The Federal Reserve has not raised interest rates since 2006. At the July 29, 2015 meeting, the Federal Open Market Committee (FOMC) again reaffirmed that to support continued progress toward maximum employment and price stability, current fed funds rates were appropriate. Most members of the FOMC have indicated that a rate increase this year will be appropriate. However Chair Yellen in her June 17, 2015 press conference said that “… no decision has been made by the Committee about what the right timing is of an increase. It will depend on unfolding data in the months ahead.” She stressed “…that the importance of a first decision to raise rates is something that should not be overblown, whether it’s September or December or March-what matters is the entire path of rates. …the Committee anticipates economic conditions that would call for a gradual evolution of the fed funds rate toward normalization.”

 

No provision for loan losses was recorded in the first half of 2015. For the first six months of 2014, a provision for loan losses of $202 thousand was recorded. See discussion under Allowance for Loan Losses for additional information.

 

For the year to date through June 30, 2015, noninterest income totaled $1.2 million, an increase of $391 thousand or 46.6% over the same period last year. Higher mortgage banking income in 2015 accounted for $331 thousand of the increase in noninterest income. The Roanoke Valley Association of Realtors reported sales of 2,177 homes for the first six months of 2015 compared to 1,936 during the same time period of 2014. Also an unexpected drop in long term interest rates in the first quarter of 2015 caused the pace of mortgage refinancing to increase significantly during the first few months of 2015. 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 $91 thousand over last year. Other income was $37 thousand higher for the first six months of 2015 compared to the same period last year, due to increases of $19 thousand in merchant processing income and $13 thousand in title insurance commissions. Gains on sales of securities were $68 thousand less in the six months ended June 30, 2015 compared to the same period in 2014.

 

 
24

 

 

Year to date June 30, 2015, noninterest expense was $6.3 million, $877 thousand or 16.1% more than the $5.5 million recorded in the same period last year. Salaries and employee benefits through June 30, 2015 were $3.2 million compared to $2.8 million last year. The $367 thousand or 13.1% 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 $131 thousand of the increase for the current year over the prior year. Mortgage related commissions increased $102 thousand over the prior year as a result of the increase in volume of mortgage loan closings. Stock compensation expense was $42 thousand higher in 2015 than the prior year primarily as the result of stock options issued at the end of 2014. The cost of stock based compensation is recognized as expense on a straight-line basis over the requisite vesting period. The remainder of the increase in salaries reflects annual cost of living and merit pay increases. Occupancy and equipment expense totaled $884 thousand through June 30, 2015, an increase of $154 thousand or 21.1% over last year. Expansion of operations accounted for much of the increase. The new Salem branch opened for business on July 28, 2014 and accounted for $59 thousand, and the Operations Center accounted for $47 thousand of the increase. Some of the costs at the Operations Center were for major repairs that are not considered of a normal recurring monthly expense. Marketing expenses were accelerated in 2015 and through June were $174 thousand higher than the prior year 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. The merger was consummated on July 1, 2015, and signage is expected to be changed during the last quarter of this year. With the completion of the sale of Valley Bank, HomeTown Bank is now the largest community bank headquartered in the Roanoke Valley.

 

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 June 30, 2015, the Company had total assets of $449 million, up $21.1 million or 4.9% over total assets of $428 million at December 31, 2014.   At the end of the second quarter of 2015, net loans had increased $22.4 million or 6.8% over year end 2014.

 

The Company’s liabilities at June 30, 2015 totaled $405 million compared to $385 million at December 31, 2014, an increase of $19.7 million or 5.1%.   Deposits accounted for $14.6 million of the increase and FHLB borrowings accounted for another $5.8 million.

 

At June 30, 2015 and December 31, 2014, the stockholders’ equity of HomeTown Bankshares was $44.3 million and $43.2 million, respectively, an increase of $1.1 million or 2.5%. The change in stockholders’ equity in the first six 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)

 

June 30, 2015

   

December 31, 2014

 

Real Estate:

               

Construction and land development

  $     $  

Residential 1-4 families

          475  

Commercial real estate

    386       758  

Commercial loans

    12        

Equity lines

           

Loans to individuals

          21  

Total nonperforming loans

    398       1,254  

Other real estate owned

    6,872       6,986  

Total nonperforming assets, excluding performing restructured loans

    7,270       8,240  

Performing restructured loans

    6,554       6,052  

Total nonperforming assets, including restructured loans

  $ 13,824     $ 14,292  


Three of the loans classified as nonaccrual and totaling $852 thousand at year end 2014 were returned to an accrual status during the second quarter of 2015 based on their performance. The remaining two loans that continued to be classified as nonaccrual at June 30, 2015 were making payments and were not past due at the end of the quarter; however they are remaining on nonaccrual until performance warrants return to accrual status.

 

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.8 million at June 30, 2015.  Four 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 June 30, 2015 and December 31, 2014. For the six months ended June 30, 2014, no loans were modified in a TDR.

 

The major classifications of other real estate owned in the consolidated balance sheets at June 30, 2015 and December 31, 2014 are included in Note 5, and the activity in other real estate owned for the first six months of 2015 and 2014 is also included in Note 5.

 

 
25

 

 

No gains or losses on sales of other real estate were recorded in the first half of 2015. Gains on sales of other real estate owned totaled $5 thousand for the six months of 2014. There were no writedowns of other real estate owned during the six months ended June 30, 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 second 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 $135 thousand and $141 thousand at June 30, 2015 and December 31, 2014, respectively.  Impaired loans totaled $8.0 million and $8.2 million at June 30, 2015 and December 31, 2014, respectively.   

 

The percentage of the allowance for loan losses to total loans was 0.94%, and 1.00% at June 30, 2015, and December 31, 2014, respectively.  Unallocated reserves were $139 thousand at June 30, 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 continued to be favorable; however a couple were downgraded from March 31, 2015 due to changes in the local economy and competition. Roanoke’s only Fortune 500 Company is nearing the completion of displacing 500 white-collar jobs and selling its 203,000 square foot office building. Economic fallout of these and other displaced workers on all of the local markets is yet to be fully determined, but is considered negative to the Roanoke MSA’s economic output. The factor for the effects of external competition and other factors was downgraded as the result of increased competition from other financial institutions in the wake of the entry of HomeTrust Bancshares into our marketing area and the merger of Valley Bank with the Bank of North Carolina.

 

Net charges offs continue to be relatively low and as a percent of average loans were 0.01% for the first half of 2015. Net charge offs as a percent of average loans were 0.12% for the year 2014. Nonperforming loans were 0.11% and 0.38% of total loans at the end of the second quarter of 2015 and at the end of 2014, respectively. The allowance for loan losses to nonaccrual loans was over 800% at June 30, 2015 and 200% at 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 $53.6 million at June 30, 2015, compared to $56.8 million at December 31, 2014, and $60.8 million at June 30, 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 June 30, 2015, the Company had borrowed $25.8 million of the $35.3 million of lendable collateral value, leaving $9.5 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 June 30, 2015. At June 30, 2015, there were no advances outstanding on the fed funds or guidance lines.

 

 
26

 

 

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

June 30, 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)

  $ 47,248       12.13

%

  $ 31,151       8.00

%

  $ 38,939       10.00

%

Tier I Common Equity (to Risk-Weighted Assets)

  $ 43,927       11.28

%

  $ 17,522       4.50

%

  $ 25,310       6.50

%

Tier I Capital (to Risk-Weighted Assets)

  $ 43,935       11.28

%

  $ 23,363       6.00

%

  $ 31,151       8.00

%

Tier I Leverage (to Average Assets)

  $ 43,935       9.87

%

  $ 17,807       4.00

%

  $ 22,259       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 June 30, 2015 outstanding commitments to extend credit including letters of credit were $86.5 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 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.

 

 
27

 

 

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. 2014-15, “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.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. 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 is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

 

 
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In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

 

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our consolidated financial statements.

 

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4.         CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.)  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

 
29

 

  

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 June 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015, and 2014;  (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 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 BANK

  

  

  

  

  

  

  

Date: August 13, 2015

  

By:

/S/ SUSAN K. STILL

  

  

  

Susan K. Still

  

  

  

President

  

  

  

Chief Executive Officer

  

  

  

  

Date August 13, 2015

  

By:

/S/ CHARLES W. MANESS, JR.

  

  

  

Charles W. Maness, Jr.

  

  

  

Executive Vice President

  

  

  

Chief Financial Officer

 

 
30

 

 

HOMETOWN BANK

FORM 10Q

 

INDEX TO EXHIBITS

 

Exhibit

 

Description

31.1

 

Certification of Chief Executive of Officer (302 Certification).

  

 

  

31.2

 

Certification of Chief Financial Officer (302 Certification).

  

 

  

32

 

Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).

 

 

 

101*

 

 

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015, and 2014;  (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 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.

 

 

 31