HomeTown Bankshares Corp - FORM 10-Q

HomeTown Bankshares Corp - FORM 10-Q - November 10, 2011

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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - HomeTown Bankshares Corp	d242658dex32.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - HomeTown Bankshares Corp	d242658dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - HomeTown Bankshares Corp	d242658dex311.htm
EXCEL - IDEA: XBRL DOCUMENT - HomeTown Bankshares Corp	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended September 30, 2011.

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

for the transition period from to .

Commission File Number: 333-158525

HOMETOWN BANKSHARES CORPORATION

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


Virginia		26-4549960
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

202 South Jefferson Street, Roanoke, Virginia		24011
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

As of November 9, 2011, 3,241,547 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX


	PART 1. FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		3

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010		4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		5

Notes to Consolidated Financial Statements		6

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21

Item 4.	CONTROLS AND PROCEDURES	21

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	(Removed and Reserved)	21

Item 5.	Other Information	21

Item 6.	Exhibits	22

SIGNATURES		23

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

HOMETOWN BANKSHARES CORPORATION

Consolidated Balance Sheets

September 30, 2011 and December 31, 2010


In Thousands, Except Share and Per Share Data	Unaudited September 30, 2011			December 31, 2010
*Assets*
Cash and due from banks	$	9,373		$	4,479
Federal funds sold		12,943			20,876
Securities available for sale, at fair value		68,194			51,603
Restricted equity securities		2,357			2,579
Loans, net of allowance for loan losses of $4,393 in 2011 and $5,228 in 2010		247,225			258,878
Property and equipment, net		9,669			8,772
Other real estate owned		7,295			2,976
Accrued income		1,182			1,222
Prepaid FDIC insurance		555			984
Other assets		667			735

Total assets	$	359,460		$	353,104


*Liabilities and Stockholders’ Equity*
Deposits:
Noninterest-bearing	$	25,273		$	17,411
Interest-bearing		280,681			283,082

Total deposits		305,954			300,493
Short term borrowings		537			281
Federal Home Loan Bank borrowings		19,000			21,350
Accrued interest payable		623			766
Other liabilities		687			558

Total liabilities		326,801			323,448


Commitments and contingencies		—			—
*Stockholders’ Equity:*
Preferred stock, $1,000 par value; 10,000 shares of series A and 374 shares of series B authorized, issued and outstanding at September 30, 2011 and December 31, 2010		10,374			10,374
Discount on preferred stock		(234	)		(287	)
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,241,547 in 2011 and 2010 (Includes 8,207 restricted shares in 2011 and 2010)		16,167			16,167
Surplus		15,452			15,436
Retained deficit		(10,186	)		(11,622	)
Accumulated other comprehensive income (loss)		1,086			(412	)

Total stockholders’ equity		32,659			29,656

Total liabilities and stockholders’ equity	$	359,460		$	353,104

See Notes to Consolidated Financial Statements

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Income

For the three months and nine months ended September 30, 2011 and 2010


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
In Thousands, Except Share and Per Share Data	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
*Interest income:*
Loans and fees on loans	$	3,518	$	3,690	$	10,583	$	10,695
Federal funds sold		10		10		30		30
Taxable investment securities		495		431		1,463		1,375


Total interest income		4,023		4,131		12,076		12,100


*Interest expense:*
Deposits		929		1,199		3,048		3,735
Other borrowed funds		122		139		387		421


Total interest expense		1,051		1,338		3,435		4,156


Net interest income		2,972		2,793		8,641		7,944


*Provision for loan losses*		349		441		863		4,128


Net interest income after provision for loan losses		2,623		2,352		7,778		3,816


*Noninterest income:*
Service charges on deposit accounts		117		114		343		360
Mortgage loan brokerage fees		35		72		70		119
Rental income		40		31		100		92
Gain on sale of other real estate		—		—		—		77
Gain on sale of investment securities		67		—		196		—
Other income		42		18		70		49


Total noninterest income		301		235		779		697


*Noninterest expense:*
Salaries and employee benefits		1,121		1,214		3,584		3,446
Occupancy and equipment expense		324		338		989		958
Data processing expense		168		111		451		330
Advertising and marketing expense		53		64		189		297
Professional fees		72		102		223		302
FDIC insurance assessment		99		129		451		389
Loss on sale and writedowns of other real estate		79		—		114		—
Other expense		371		319		1,067		896

Total noninterest expense		2,287		2,277		7,068		6,618

Net income (loss) before income taxes		637		310		1,489		(2,105	)
Income tax expense		—		—		—		—

Net income (loss)		637		310		1,489		(2,105	)

Dividends accumulated on preferred stock		134		134		400		400
Accretion of discount on preferred stock		18		16		53		51

Net income (loss) available to common shareholders	$	485	$	160	$	1,036	$	(2,556	)

*Income (loss) per common share, basic and diluted*	$	0.15	$	0.05	$	0.32	$	(0.79	)

*Weighted average common shares outstanding*		3,241,547		3,241,547		3,241,547		3,239,773

See Notes to Consolidated Financial Statements

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Cash Flows

Nine months ended September 30, 2011 and 2010


In Thousands	Unaudited September 30, 2011			Unaudited September 30, 2010
*Cash flows from operating activities:*
Net income (loss)	$	1,489		$	(2,105	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization		409			465
Provision for loan losses		863			4,128
Amortization of premium on securities, net		334			212
Loss (gain) on sale of investment securities		(196	)		—
Loss (gain) on sale and writedowns of other real estate		114			(77	)
Stock compensation expense		16			40
Changes in assets and liabilities:
Accrued income		40			(95	)
Other assets		497			(1,759	)
Accrued interest payable		(143	)		(322	)
Other liabilities		129			416

Net cash flows provided by operating activities		3,552			903


*Cash flows from investing activities:*
Net decrease in federal funds sold		7,933			9,453
Purchases of investment securities		(38,794	)		(24,683	)
Sales/maturities of available for sale securities		23,563			19,928
Sale (purchase) of restricted equity securities, net		222			(140	)
Net (increase) decrease in loans		5,938			(15,757	)
Proceeds from sale of other real estate		419			344
Purchases of property and equipment		(1,306	)		(1,126	)

Net cash flows (used in) investing activities		(2,025	)		(11,981	)


*Cash flows from financing activities:*
Net increase (decrease) in noninterest-bearing deposits		7,862			(2,404	)
Net increase (decrease) in interest-bearing deposits		(2,401	)		23,175
Net increase (decrease) in short-term borrowings		256			(33	)
Net decrease in long-term FHLB borrowings		(2,350	)		(4,250	)
Preferred stock dividend payment		—			(267	)

Net cash flows provided by financing activities		3,367			16,221

Net increase in cash and cash equivalents		4,894			5,143
*Cash and cash equivalents, beginning*		4,479			7,051

*Cash and cash equivalents, ending*	$	9,373		$	12,194


*Supplemental disclosure of cash flow information:*
Cash payments for interest	$	3,578		$	4,478

Cash payments for income taxes	$	—		$	—

*Supplemental disclosure of noncash investing activities:*
Unrealized gain (loss) on securities available for sale	$	1,498		$	1,249

Transfer from loans to other real estate	$	4,852		$	1,835

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

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

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

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

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

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

Note 2. Investment Securities

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


(Dollars In Thousands)	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	28,290	$	436	$	(38	)	$	28,688
Mortgage-backed securities		32,487		557		(27	)		33,017
Municipal securities		6,331		224		(66	)		6,489

	$	67,108	$	1,217	$	(131	)	$	68,194


(Dollars In Thousands)	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	23,632	$	210	$	(497	)	$	23,345
Mortgage-backed securities		26,343		52		(75	)		26,320
Municipal securities		2,040		—		(102	)		1,938

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

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

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


	September 30, 2011
	Less than 12 months					12 months or more				Total
(Dollars In Thousands)	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U. S. Government agency securities	$	4,203	$	(38	)	$	—	$	—	$	4,203	$	(38	)
Mortgage-backed securities		6,000		(27	)		—		—		6,000		(27	)
Municipal securities		1,931		(66	)		—		—		1,931		(66	)

	$	12,134	$	(131	)	$	—	$	—	$	12,134	$	(131	)


	December 31, 2010
	Less than 12 months					12 months or more				Total
(Dollars In Thousands)	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U. S. Government agency securities	$	14,833	$	(497	)	$	—	$	—	$	14,833	$	(497	)
Mortgage-backed securities		16,086		(75	)		—		—		16,086		(75	)
Municipal securities		1,686		(102	)		—		—		1,686		(102	)

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

There are 0 debt securities with fair values totaling $0 million considered temporarily impaired at September 30, 2011. The primary cause of impairment was fluctuations in interest rates. At September 30, 2011, the Company does not consider any bond in an unrealized loss position to be other than temporarily impaired.

The Company realized a $0 thousand gain on sale of its available for sale securities for the period ended September 30, 2011 and had no realized gain or loss on sale of securities in the first quarter of 2010.

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


(Dollars In Thousands)	Amortized Cost		Estimated Fair Value
Less than one year	$	—	$	—
Over one through five years		4,066		4,134
Over five through ten years		25,460		25,958
Greater than 10 years		37,582		38,102

	$	67,108	$	68,194

Note 3. Loans Receivable

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


(Dollars In Thousands)	September 30, 2011			December 31, 2010
Construction:
Residential	$	4,817		$	7,608
Land acquisition, development & commercial		26,318			28,981
Real Estate:
Residential		56,646			55,381
Commercial		101,363			109,674
Commercial, industrial & agricultural		36,961			39,204
Equity lines		20,452			20,121
Consumer		5,061			3,137

Total Loans	$	251,618		$	264,106

Less allowance for loan losses		(4,393	)		(5,228	)

Loans, net	$	247,225		$	258,878

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

		$253,420		$253,420		$253,420		$253,420		$253,420		$253,420		$253,420
(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	236	$	—	$	—	$	236	$	4,581	$	4,817	$	—
Land acquisition, development & commercial		—		97		—		97		26,221	$	26,318		980
Real Estate:
Residential		—		—		—		—		56,646	$	56,646		179
Commercial		—		—		—		—		101,363	$	101,363		—
Commercial, industrial & agricultural		—		140		—		140		36,821	$	36,961		—
Equity lines		—		—		—		—		20,452	$	20,452		643
Consumer		11		—		—		11		5,050	$	5,061		—

Total	$	247	$	237	$	—	$	484	$	251,134	$	251,618	$	1,802

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

		$253,420		$253,420		$253,420		$253,420		$253,420		$253,420		$253,420
(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	—	$	—	$	224	$	224	$	7,384	$	7,608	$	224
Land acquisition, development & commercial		960		429		2,166		3,555		25,426		28,981		2,166
Real Estate:										—
Residential		261		5,016		875		6,152		49,229		55,381		875
Commercial		—		—		—		—		109,674		109,674
Commercial, industrial & agricultural		—		—		419		419		38,785		39,204		419
Equity lines		202		132		—		334		19,787		20,121		—
Consumer		2		—		—		2		3,135		3,137		—

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

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

Impaired loans, which include TDRs of $4.7 million and the related allowance at September 30, 2011 were as follows:


(Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	570	$	570	$	—	$	1,506	$	19
Land acquisition, development & commercial		5,940		6,891		664		6,555		96
Real Estate:
Residential		179		179		—		2,328		30
Commercial		10,447		10,697		239		9,087		207
Commercial, industrial & agricultural		104		104		—		273		8
Equity lines		643		643		88		194		—
Consumer		—		—		—		—		—

Total	$	17,883	$	19,084	$	991	$	19,943	$	360

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


(Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	2,007	$	2,007	$	—	$	1,250	$	36
Land acquisition, development & commercial		7,893		9,229		1,065		7,349		239
Real Estate:
Residential		7,210		7,210		175		6,903		192
Commercial		9,302		9,302		282		6,322		273
Commercial, industrial & agricultural		428		428		—		960		17
Equity lines		—		—		—		49		—
Consumer		—		—		—		—		—

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

Troubled Debt Restructurings

Included in certain loan categories in the impaired loans table above are troubled debt restructurings (“TDR’s”) that were classified as impaired. TDR’s at September 30, 2011 are comprise of 2 loans totaling $4.7 million, both of which are performing in accordance with their restructured terms and are not on nonaccrual status. This compares with $1.9 million in total restructured loans at December 31, 2010. The amount of the valuation allowance related to total TDR’s was $239,000 and $0 as of September 30, 2011 and December 31, 2010 respectively.

The $4.7 million in TDR’s which were performing as agreed under restructured terms as of September 30, 2011 is represented by two commercial real estate loans. The Company considers all loans classified as TDR’s to be impaired as of September 30, 2011.

As a result of adopting the amendments in ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” The Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance using review procedures in effect at that time.

The following table presents by class of loan, information related to loans modified in a TDR during the nine and three months ended September 30, 2011:


	Loans modified as TDR’s For the nine months ended September 30, 2011
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real Estate loans:		—		—		—
Residential		—		—		—

Commercial		1		2,984		2,734

Commercial, industrial, agricultural
Equity lines		—		—		—
Consumer		—		—		—

Total Loans		1	$	2,984	$	2,734


	Loans modified as TDR’s For the three months ended September 30, 2011
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real Estate loans:		—		—		—
Residential		—		—		—

Commercial		1		2,984		2,734

Commercial, industrial, agricultural
Equity lines		—		—		—
Consumer		—		—		—

Total Loans		1	$	2,984	$	2,734

During the nine months ended September 30, 2011, the Company modified one loan that was considered to be a TDR. We accepted a permanent reduction in the recorded investment in the loan. No loans modified as TDR’s from October 1, 2010 through September 30, 2011 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the nine and three months ended September 30, 2011.

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 TDR’s 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, the specific reserve associated with the loan 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 TDR’s.

Note 4. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:


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

Balance at the beginning of the year	$	5,228		$	2,862
Provision charged to operations		863			6,453
Recoveries of loans charged off		3			77

Loans charged off		(1,701	)		(4,164	)

Balance at the end of the year	$	4,393		$	5,228

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


	Construction						Real Estate
	Residential			Land acquisition, development & commercial			Residential			Commercial			Commercial, industrial & agricultural			Equity lines			Consumer			Unallocated		Total
Beginning balance	$	121		$	1,802		$	785		$	1,356		$	902		$	222		$	40		$	—	$	5,228
Charge-offs		—			(877	)		(170	)		(356	)		(139	)		(158	)		(1	)		—		(1,701	)
Recoveries		—			—			—			—			—			—			3			—		3
Provisions		(88	)		481			(104	)		89			107			295			83			—		863

Ending Balance	$	33		$	1,406		$	511		$	1,089		$	870		$	359		$	125		$	—	$	4,393


Ending balance: Individually evaluated for impairment	$	—		$	664		$	—		$	239		$	—		$	88		$	—		$	—	$	991


Ending balance: Collectively evaluated for impairment	$	33		$	742		$	511		$	850		$	870		$	271		$	125		$	—	$	3,402


Loans:

Ending balance	$	4,817		$	26,318		$	56,646		$	101,363		$	36,961		$	20,452		$	5,061		$	—	$	251,618


Ending balance: Individually evaluated for impairment	$	570		$	5,940		$	179		$	10,447		$	104		$	643		$	—		$	—	$	17,883


Ending balance: Collectively evaluated for impairment	$	4,247		$	20,378		$	56,467		$	90,916		$	36,857		$	19,809		$	5,061		$	—	$	233,735

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

Allowance for loan losses:


	Construction				Real Estate
	Residential		Land acquisition, development & commercial		Residential		Commercial		Commercial, industrial & agricultural		Equity lines		Consumer		Total

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

Ending balance: Individually evaluated for impairment	$	—	$	1,065	$	175	$	282	$	—	$	—	$	—	$	1,522


Ending balance: Collectively evaluated for impairment	$	121	$	737	$	610	$	1,274	$	702	$	222	$	40	$	3,706


Loans:

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

Ending balance: Individually evaluated for impairment	$	2,007	$	7,893	$	7,210	$	9,302	$	428	$	—	$	—	$	26,840


Ending balance: Collectively evaluated for impairment	$	5,601	$	21,088	$	48,171	$	100,372	$	38,776	$	20,121	$	3,137	$	237,266

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


(Dollars In Thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Doubtful Nonaccrual		Total
Construction:
Residential	$	4,247	$	—	$	570	$	—	$	—	$	4,817
Land acquisition, development & commercial		18,791		2,157		4,390		336		644		26,318
Real Estate:
Residential		55,876		529		62		179		—		56,646
Commercial		89,367		3,868		8,128		—		—		101,363
Commercial, industrial & agricultural		36,961		—		—		—		—		36,961
Equity lines		18,788		181		840		643		—		20,452
Consumer		4,957		—		104		—		—		5,061

Total	$	228,987	$	6,735	$	14,094	$	1,158	$	644	$	251,618

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


(Dollars In Thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Total
Construction:
Residential	$	5,250	$	350	$	1,784	$	224	$	7,608

Land acquisition, development & commercial		18,564		2,524		5,727		2,166	$	28,981
Real Estate:
Residential		47,782		223		6,501		875	$	55,381

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

Commercial, industrial & agricultural		37,239		35		1,511		419	$	39,204
Equity lines		20,121		—		—		—	$	20,121
Consumer		3,059		—		78		—	$	3,137

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

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

Note 5. Stock Based Compensation

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Company’s Board of Directors may grant stock options to directors, officers and employees. The Plan authorizes grants of options to purchase up to 550,000 shares of the Company’s authorized but unissued common stock. Accordingly, options for the purchase of 485,760 shares of authorized common stock have been issued under the Plan and 64,240 shares of authorized common stock are available for issue under the Plan. There are options for 485,760 shares granted currently outstanding as of September 30, 2011, of which, 483,927 options are vested. All stock options have been granted with an exercise price equal to the stock’s fair market value at the date of the grant. As of September 30, 2011, no options have been exercised. The Company recorded compensation expense of $16 thousand and $40 thousand for the nine months ended September 30, 2011 and 2010. The aggregate intrinsic value of outstanding stock options was $0 at September 30, 2011. The weighted average remaining contractual term of outstanding options was 4.9 years at September 30, 2011.

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

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

The remaining unamortized compensation expense for stock options and restricted stock was $39 thousand at September 30, 2011 and will be recognized over the next 3.0 years.

Note 6. Fair Value Measurement

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

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

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

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

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

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

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

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

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


(Dollars In Thousands)			Carrying value at September 30, 2011
Description	Balance as of September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	28,688		$	28,688
Mortgaged-backed securities		33,017			33,017
Municipal securities		6,489			6,489
Derivative assets		215			215
Liabilities:
Derivative liabilities	$	215		$	215

(Dollars In Thousands)			Carrying value at December 31, 2010
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	23,345		$	23,345
Mortgaged-backed securities		26,320			26,320
Municipal securities		1,938			1,938
Derivative assets		301			301
Liabilities:
Derivative liabilities	$	301		$	301

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

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

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

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

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

		$0,000	$0,000		$0,000		$0,000
(Dollars In Thousands)			Carrying value at September 30, 2011
Description	Balance as of September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of valuation allowance	$	16,892		$	8,687	$	8,205
Other real estate owned	$	7,295		$	7,295

(Dollars In Thousands)			Carrying value at December 31, 2010
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of valuation allowance	$	25,318		$	211	$	25,107
Other real estate owned	$	2,976		$	2,976

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

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

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

Available-for-sale and restricted equity securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying values of restricted equity securities approximate fair values, based on the redemption provisions of the entities.

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

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

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

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

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

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

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

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


(Dollars in Thousands)	September 30, 2011				December 31, 2010
	Carrying Amounts		Approximate Fair Values		Carrying Amounts		Approximate Fair Values
*Financial assets*
Cash and due from banks	$	9,373	$	9,373	$	4,479	$	4,479
Federal funds sold		12,943		12,943		20,876		20,876
Securities available-for-sale		68,194		68,194		51,603		51,603
Loans, net		247,225		244,598		258,878		256,127
Accrued income		1,182		1,182		1,222		1,222
Derivative assets		215		215		301		301
*Financial liabilities*
Total deposits		305,954		306,707		300,493		301,233
Short term borrowings		537		537		281		281
FHLB borrowings		19,000		19,835		21,350		22,246
Accrued interest payable		623		623		766		766
Derivative liabilities		215		215		301		301

ITEM 2.

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

Forward-looking Statements

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

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

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

Our Business

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

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

Critical Accounting Policies

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

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) that losses be accrued when they are probable of occurring and are capable of estimation and (ii) that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses is maintained at a level, which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio.

The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a detailed quarterly analysis of the allowance based on our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and the economic trend. These are generally grouped by homogeneous loan pools. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term.

However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.

Discussion of Operations

Nine Months Ended September 30, 2011

The Company recorded net income of $1.5 million for the nine months ended September 30, 2011 compared with a net loss of $2.1 million for the nine months ended September 30, 2010. After net accumulated dividends on preferred stock of $453 thousand in 2011 and $451 in 2010, the company had net income available to common shareholders of $.32 per share, compared with a net loss of $(.79) per share in 2010.

For the nine months ended September 30, 2011, net interest income increased $697 thousand from $7.9 million in 2010 to $8.6 million in 2011. This increase in net interest income is due to improvement in the net interest margin of 21 basis points to 3.43% for the nine months ended September 30, 2011 compared to the same period in 2010. The improvement in the net interest margin is due to the reduction in the cost of funds from 1.76% in 2010 to 1.40% in 2011. Average earning assets increased by $7.4 million in 2011 compared to 2010.

The provision for loan losses was $863 thousand for the first nine months of 2011, compared to $4.1 million for the same period last year. The allowance for loan losses was increased significantly in the second and fourth quarters of 2010. The lower provision in the current year compared to last year is due to a lower level of impaired loans, a reduction in net charge-offs, and a decline in general in loan volume. Impaired loans totaled $17.9 million at September 30, 2011, a decrease of $10.4 million from $28.3 million on the same day a year ago. Year to date net charge offs totaled $1.7 million as of September 30, 2011, down $2.4 million from a total of $4.1 million for the same period last year. The adequacy of general reserves is determined by dividing the remaining loan portfolio into 30 homogenous pools, each with its unique degree of inherent risk and applying a loss factor to each pool of loans. In determining the loss factor for each pool of homogenous loans the following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans and classified loans.

In the first nine months of 2011, noninterest income increased from $697 thousand in 2010 to $779 thousand in 2011. In 2011 non recurring income from gains on the sale of investment securities totaled $196 thousand. In 2010, non recurring income from gains on the sale of other real estate owned totaled $77 thousand. In other recurring income categories, service charges on deposit accounts decreased from $360 thousand in 2010 to $343 thousand in 2011, a decrease $17 thousand or 4.7%. Mortgage loan brokerage fees decreased by $49 thousand from the first nine months of 2010 due to the softness of the residential housing market. Rental income was $100 thousand for the first nine months of 2011 compared to $92 thousand for the same period in 2010. Other income totaled $70 thousand year to date September 30, 2011 compared to $49 thousand for the same period last year. The current year included the recognition of $27 thousand in servicing fee income from a loan that has now been fully repaid.

Noninterest expense increased $450 thousand or 6.8% for the nine months ended September 30, 2011 when compared to the same period in 2010. The current year includes $114 loss on the sale of other real estate owned compared to no similar losses in 2010. Salaries and employee benefits increased $138 thousand or 4.0% from $3.4 million in 2010 to $3.6 million in 2011. This increase is due to increases in staffing to manage non performing assets and the creation in 2011 of an internal loan review department. In addition, the company has experienced increases in the cost of health care benefits. Occupancy and equipment expense increased $31 thousand or 3.2% to a total of $989 thousand for the nine months ended September 30, 2011 compared to 2010. The increase was due to higher real estate taxes as the result of the new property leased in 2010 and taxes associated with increased foreclosure activity. Year to date September 30, 2011, data processing expense was $121 thousand higher than the prior year due to the growth in the volume of customer accounts, the cost of some new enhancements to our core system software, and non-recurring conversion related expenses. Advertising and marketing expense was $108 thousand or 36.4% below last year due to an advertising campaign conducted in the second quarter of 2010 that was not repeated in 2011. FDIC Deposit Insurance increased $62 thousand from $389 thousand for the nine months ended September 30, 2010 to $451 thousand for the nine months ended September 30, 2011 due to an increase in the insurance rate. Professional fees for the nine months ended September 30, 2011 were $223 thousand, $79 thousand less than the same period last year. Lower consulting fees in 2011, were partially offset by increased legal fees related to non-performing assets. Other noninterest expense rose $171 thousand to $1.1 million year to date September 30, 2011 due to higher expenses related to other real estate owned.

Three Months Ended September 30, 2011

The Company had net income of $637 thousand for the three months ended September 30, 2011 compared with net income of $310 thousand for the three months ended September 30, 2010. After accumulated dividends on preferred stock of $152 thousand in 2011 and $150 in 2010, the company had net income available to common shareholders of $.15 per share, compared with $.05 per share in 2010.

The $327 thousand improvement in the net income position is due mainly to improved net interest income, which increased $179 thousand or 6.4% from $2.8 million for the third quarter of 2010 to $3.0 million for the same period in 2011. Net interest income rose due to the improvement in the net interest margin from 3.31% in 2010 to 3.53% in 2011 due primarily to lower rates paid on deposits in the lower interest rate environment. A lower provision for loan losses and higher noninterest income were also contributing factors to the higher net income position in 2011.

The provision for loan losses was $349 thousand for the three months ended September 30, 2011 compared to $441 thousand for the same period in 2010. The allowance for loan losses was increased significantly in the second and fourth quarters of 2010. The $92 thousand decrease in the provision for the third quarter of 2011 compared to the same period in 2010 resulted from a lower level of impaired loans, a reduction in net charge-offs, and a decline in general in loan volume as previously discussed. Lower general reserves since year end were also a factor in the lower provision and were calculated by dividing the remaining loan portfolio into 30 homogeneous pools, each with its unique degree of inherent risk. These pools are detailed in the allowance for loan loss calculation and are applied a loss percentage. The following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans, and classified loans.

For the third quarter of 2011, noninterest income increased $66 thousand to $301 thousand from $235 thousand for the same period in 2010, as the result of $67 thousand in gains realized from the sales of investment securities. Mortgage loan brokerage fees declined $37 thousand or 51.4% to $35 thousand for the three months ended September 30, 2011 compared to a year ago. Rental income for the third quarter of 2011 was $40 thousand, $9 thousand higher than the same period last year due to the collection of delinquent rental income from other real estate owned that was leased. Other income for the three months ended September 30, 2011 was $24 thousand higher than the three months last year due to the recognition of $27 thousand in servicing fee income from a loan that has now been fully repaid.

Noninterest expense totaled $2.3 million for the third quarter of 2011 and 2010, $10 thousand or less than 1% higher for the three months ended on September 30, 2011 when compared to the same period in 2010. The current year included $79 thousand of write downs and losses on sale of other real estate owned. Salaries and employee benefits totaled $1.1 million for the third quarter 2011, $93 thousand less than the same quarter last year. The decrease was due to a $125 thousand increase in the deferral of loan origination costs as a result of a higher number of student loan originations in 2011. Occupancy and equipment totaled $324 thousand for the third quarter of 2011 and was $13 thousand or 4.1% less than the third quarter of 2010, primarily as the result of lower depreciation costs for furniture and fixtures. Data processing expense increased from $111 thousand for the three months ended September 30, 2010 to $168 thousand for the same period in 2011, an increase of $57 thousand or 51%. This increase in data processing costs is attributed to the growth of the Company and the addition of new online banking capabilities and other core system enhancements. Advertising and marketing expense was $53 thousand and $64 thousand for the three months ended September 30, 2011 and 2010, respectively. Professional fees totaled $72 thousand for the third quarter of 2011 compared to $102 thousand for the third quarter of 2010. The third quarter FDIC insurance assessment expense totaled $99 thousand and $129 thousand for the third quarter of 2011 and 2010, respectively. Effective July 1, 2011 the FDIC insurance rate was lowered and the assessment base changed to net assets rather than total deposits. The effect of these changes were to lower our FDIC insurance costs. Other expense increased $52 thousand or 16.3% to $371 thousand for the three months ended September 30, 2011 compared to the same period in 2010, as the result of higher other real estate owned related expenses.

Financial Condition

At September 30, 2011, the Company had total assets of $359 million compared to $353 million at December 31, 2010. Total assets increased $6.4 million or 1.8% since year end 2010. At September 30, 2011, assets were comprised principally of loans, federal funds sold, and investment securities. Lower loan demand and a $4.3 million increase in other real estate owned led to a $12 million decrease in net loans from December 31, 2010 to $247 million at September 30, 2011. Federal funds sold decreased to $7.9 million from $20.9 million at December 31, 2010. Investment securities increased $16.6 million to $68.2 million at the end of the third quarter of 2011.

The Company’s liabilities at September 30, 2011 totaled $327 million compared to $323 million at December 31, 2010, an increase of $3.4 million or 1.0%. Noninterest-bearing deposits increased by $7.9 million, while interest-bearing deposits were down $2.4 million from December 31, 2010 to September 30, 2011.

At September 30, 2011 and December 31, 2010, the Company had stockholders’ equity of $32.7 million and $29.7 million, respectively, an increase of $3.0 million or 10.1%. Changes to stockholders’ equity year to date through September 30, 2011 included net income of $1.5 million and an increase in the market value of investment securities available for sale of $1.5 million which increased stockholders’ equity.

On September 18, 2009, as part of the Troubled Asset Relief Program-Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement with the United States Department of the Treasury pursuant to which the Company issued 10 thousand shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A for a purchase price of $10 million in cash and issued a warrant to purchase 374.37437 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B for a per share price of $1.00 per share, which was exercised immediately.

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

Non-performing Assets

Non-performing assets consist of loans past-due ninety days or more and still accruing interest, non-accrual loans and repossessed and foreclosed assets. The Company had no loans past due ninety days or more and still accruing interest and 5 nonaccrual loans totaling $1.8 million as well as $7.3 million of other real estate owned at September 30, 2011.

Allowance for Loan Losses

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

Specific loss reserves for loans individually evaluated for impairment totaled $991,000 at September 30, 2011 compared to $1,522,000 at December 31, 2010, a decrease of $531 thousand. Impaired loans declined $8.9 million from $26.8 million at December 31, 2010 to $17.9 million at September 30, 2011. This decrease in the level of impaired loans was due primarily to foreclosure on properties securing impaired loans totaling $6.1 million and the upgrading of four loans totaling $6.2 million. These actions were offset by the identification of new impaired loans totaling $3.4 million. General loss reserves totaled $3.4 million at September 30, 2011 compared to $3.7 million at

December 31, 2010. Based on the general reserves established on loans collectively evaluated for impairment and the specific reserves for loans individually evaluated for impairment, the Company recorded a provision for loan losses of $349 thousand in the third quarter of 2011 compared to $441 thousand in the same quarter of 2010. Based on this evaluation, the percentage of the allowance for loan losses to total loans was 1.75% at September 30, 2011 and 1.98% at December 31, 2010.

Liquidity

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

At September 30, 2011, cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, loans maturing within one year, and expected maturities, calls and principal repayments from the securities portfolio within one year totaled $90.1 million. At September 30, 2011, 23% or $58.1 million of the loan portfolio would mature within one year. At September 30, 2011, non-deposit sources of available funds totaled $28.9 million, which included $9.9 million immediately available from FHLB. During the first nine months of 2011, other borrowing activity included a principal pay down of $2.4 million of FHLB borrowings compared to $4.3 million during the same period last year.

Capital Requirements

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


(in thousands except for percentages)	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2011
Total Capital (to Risk-Weighted Assets)
Consolidated	$	34,848		13.4	%	$	20,805		8.0	%		N/A		N/A
HomeTown Bank	$	32,523		12.5	%	$	20,815		8.0	%	$	26,018		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	$	31,573		12.1	%	$	10,437		4.0	%		N/A		N/A
HomeTown Bank	$	29,248		11.2	%	$	10,446		4.0	%	$	15,669		6.0	%
Tier I Capital (to Average Assets)
Consolidated	$	31,573		8.8	%	$	14,351		4.0	%		N/A		N/A
HomeTown Bank	$	29,248		8.1	%	$	14,443		4.0	%	$	18,054		5.0	%

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 September 30, 2011 outstanding commitments to extend credit including letters of credit were $37.9 million. There are no commitments to extend credit on impaired loans.

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

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about

postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Bank’s/Company’s (consolidated) financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, were required for periods beginning on or after December 15, 2010. The Bank/Company has included the required disclosures in its (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Bank’s/Company’s (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Bank’s/Company’s (consolidated) financial statements.

The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Bank/Company complied with this Rule beginning with the filing of the June 30, 2011 Form 10-Q.

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

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

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU

should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Bank/Company is currently assessing the impact that ASU 2011-05 will have on its (consolidated) financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Bank’s/Company’s (consolidated) financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Bank/Company is currently assessing the impact that ASU 2011-08 will have on its (consolidated) financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

PART II OTHER INFORMATION

Item 1.

Legal Proceedings.

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

Item 1A.

Risk Factors.

Not applicable to smaller reporting companies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

(Removed and Reserved)

Item 5.

Other Information

None

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 September 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011, and 2010; (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010; and (v) Notes to Financial Statements.

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

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: November 10, 2011	By:	/S/ SUSAN K. STILL
		Susan K. Still

		President

		Chief Executive Officer

Date: November 10, 2011	By:	/S/ CHARLES W. MANESS, JR.
		Charles W. Maness, Jr.

		Executive Vice President

		Chief Financial Officer

HOMETOWN BANK

FORM 10Q

INDEX TO EXHIBITS


Exhibit		Description

31.1		Certification of Chief Executive of Officer (302 Certification).

31.2		Certification of Chief Financial Officer (302 Certification).

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

101*		Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011, and 2010; (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010; and (v) Notes to Financial Statements.

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company