---

---

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 September 30, 2014.

 

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 November 14, 2014, 3,287,567 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 September 30, 2014 and December 31, 2013		1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013		2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013		3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013		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	25
Item 4.	CONTROLS AND PROCEDURES	26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosure	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		28

 

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, 2014 and December 31, 2013

  

Dollars In Thousands, Except Share and Per Share Data		September 30, 2014				December 31, 2013
		(Unaudited)
Assets
Cash and due from banks		$	14,051			$	19,537
Federal funds sold			111				738
Securities available for sale, at fair value			56,662				57,922
Restricted equity securities, at cost			2,577				2,564
Loans held for sale			317				−
Loans, net of allowance for loan losses of $3,522 in 2014 and $3,721 in 2013			315,842				294,212
Property and equipment, net			13,536				12,155
Other real estate owned, net of valuation allowance of $513 in 2014 and $935 in 2013			8,686				8,143
Bank owned life insurance			3,595				3,518
Deferred tax asset, net			100				1,159
Accrued income			1,777				1,877
Other assets			659				612
Total assets		$	417,913			$	402,437
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing		$	47,179			$	46,232
Interest-bearing			304,298				293,538
Total deposits			351,477				339,770
Short term borrowings			469				258
Federal Home Loan Bank borrowings			22,250				22,000
Accrued interest payable			295				286
Other liabilities			1,174				585
Total liabilities			375,665				362,899
Commitments and contingencies			−				−
Stockholders’ Equity:
Convertible preferred stock, no par value; Series C 20,000 shares authorized, 14,000 issued and outstanding at September 30, 2014 and December 31, 2013			13,293				13,293
Common stock, $5 par value; authorized 10,000,000 shares; issued and outstanding 3,287,567(includes 37,727 restricted shares) at September 30, 2014 and 3,270,299 (includes 27,846 restricted shares) at December 31, 2013			16,438				16,351
Surplus			15,293				15,339
Retained deficit			(3,063	)			(4,846	)
Accumulated other comprehensive income (loss)			287				(599	)
Total stockholders’ equity			42,248				39,538
Total liabilities and stockholders’ equity		$	417,913			$	402,437

 

See Notes to Consolidated Financial Statements

 

  

 

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2014 and 2013

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2014				2013				2014				2013
Dollars In Thousands, Except Share and Per Share Data		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Interest income:
Loans and fees on loans		$	3,845			$	3,637			$	11,314			$	10,687
Taxable investment securities			240				288				770				979
Nontaxable investment securities			106				58				293				121
Dividends on restricted stock			32				25				94				73
Other interest income			9				12				30				33
Total interest and dividend income			4,232				4,020				12,501				11,893
Interest expense:
Deposits			426				459				1,308				1,402
Other borrowed funds			94				94				286				281
Total interest expense			520				553				1,594				1,683
Net interest income			3,712				3,467				10,907				10,210
Provision for loan losses			-				-				202				125
Net interest income after provision for loan losses			3,712				3,467				10,705				10,085
Noninterest income:
Service charges on deposit accounts			118				77				326				227
ATM and interchange income			113				84				316				245
Mortgage loan brokerage fees			102				62				149				225
Gains on sales of investment securities			-				8				108				116
Other income			168				87				441				275
Total noninterest income			501				318				1,340				1,088
Noninterest expense:
Salaries and employee benefits			1,510				1,355				4,303				4,072
Occupancy and equipment expense			398				331				1,128				972
Data processing expense			177				152				529				437
Advertising and marketing expense			196				99				431				364
Professional fees			245				88				432				385
Bank franchise taxes			65				51				196				152
FDIC insurance expense			85				128				197				399
Gains, losses on sales and writedowns of other real estate owned, net			-				-				(5	)			351
Other real estate owned expense			50				91				173				192
Directors' fees			56				52				165				162
Other expense			310				290				997				790
Total noninterest expense			3,092				2,637				8,546				8,276
Net income before income taxes			1,121				1,148				3,499				2,897
Income tax expense			344				376				1,086				958
Net income			777				772				2,413				1,939
Effective dividends on preferred stock			210				372				630				639
Accretion of discount on preferred stock			-				102				-				142
Net income available to common shareholders		$	567			$	298			$	1,783			$	1,158
Basic earnings per common share		$	0.17			$	0.09			$	0.54			$	0.35
Diluted earnings per common share		$	0.14			$	0.09			$	0.44			$	0.33
Weighted average common shares outstanding			3,287,567				3,270,299				3,283,962				3,268,646
Diluted weighted average common shares outstanding			5,527,567				5,510,299				5,523,962				4,048,133

 

See Notes to Consolidated Financial Statements

 

   

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Comprehensive Income

For the Three and Nine Months ended September 30, 2014 and 2013

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
Dollars In Thousands		2014				2013				2014				2013
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income		$	777			$	772			$	2,413			$	1,939
Other Comprehensive Income (Loss):
Net unrealized holding gains (losses) on securities available for sale during the period			168				(438	)			1,450				(2,506	)
Deferred income tax (expense) benefit on unrealized holding gains (losses) on securities available for sale			(57	)			149				(493	)			847
Reclassification adjustment for gains included in net income			-				(8	)			(108	)			(116	)
Tax expense related to realized gains on securities sold			-				3				37				39
Total other comprehensive income (loss)			111				(294	)			886				(1,736	)
Comprehensive income		$	888			$	478			$	3,299			$	203

  

See Notes to Consolidated Financial Statements

 

   

 

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014 and 2013

 

		For the Nine Months Ended September 30,
		2014				2013
Dollars In Thousands		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income		$	2,413			$	1,939
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			482				391
Provision for loan losses			202				125
Amortization of premium on securities, net			438				519
Gains, losses on sales and writedowns of other real estate, net			(5	)			351
Gains on sales of investment securities			(108	)			(116	)
Gains on disposals of fixed assets			-				(7	)
Increase in value of life insurance contracts			(77	)			-
Stock compensation expense			41				29
Changes in assets and liabilities:
Loans held for sale			(317	)			-
Deferred tax asset, net			603				835
Accrued income			100				(191	)
Other assets			(47	)			1,054
Accrued interest payable			9				(23	)
Other liabilities			589				(572	)
Net cash flows provided by operating activities			4,323				4,334
Cash flows from investing activities:
Net decrease (increase) in federal funds sold			627				(1,224	)
Purchases of investment securities			(6,438	)			(16,684	)
Sales, maturities, and calls of available for sale securities			8,710				17,517
(Purchase) redemption of restricted equity securities, net			(13	)			177
Net increase in loans			(23,352	)			(14,231	)
Proceeds from sales of other real estate			982				1,800
Purchases of property and equipment			(1,863	)			(2,010	)
Proceeds from disposals of property and equipment			-				9
Net cash flows used in investing activities			(21,347	)			(14,646	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits			947				10,736
Net increase in interest-bearing deposits			10,760				4,635
Net increase in short-term borrowings			211				306
Net increase (decrease) in long-term FHLB borrowings			250				(3,000	)
Preferred stock issue, net			-				13,300
Preferred stock redeemed			-				(10,374	)
Preferred stock dividend payment			(630	)			(639	)
Net cash flows provided by financing activities			11,538				14,964
Net (decrease) increase in cash and cash equivalents			(5,486	)			4,652
Cash and cash equivalents, beginning			19,537				9,812
Cash and cash equivalents, ending		$	14,051			$	14,464
Supplemental disclosure of cash flow information:
Cash payments for interest		$	1,585			$	1,706
Cash payments for income taxes		$	42			$	38
Supplemental disclosure of noncash investing activities:
Transfer from loans to other real estate		$	1,520			$	1,613

 

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, 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, 2014 and for the periods ended September 30, 2014 and 2013 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 September 30, 2014 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, 2013, included in the Company’s Form 10-K for the year ended December 31, 2013. 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 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 Form 10-K for these policies.

 

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date of this filing.

 

Note 2. Investment Securities

 

The amortized cost and fair value of available-for-sale securities as of September 30, 2014 and December 31, 2013, are as follows:

 

(Dollars In Thousands)		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U. S. Government agency securities		$	27,109			$	308			$	(225	)		$	27,192
Mortgage-backed securities			11,212				144				(74	)			11,282
Municipal securities			17,906				425				(143	)			18,188
		$	56,227			$	877			$	(442	)		$	56,662

 

(Dollars In Thousands)		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U. S. Government agency securities		$	26,489			$	235			$	(440	)		$	26,284
Mortgage-backed securities			15,328				193				(160	)			15,361
Municipal securities			17,012				68				(803	)			16,277
		$	58,829			$	496			$	(1,403	)		$	57,922

   

 

  

U. S. Government and federal agency securities: The unrealized losses on 22 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 September 30, 2014.

 

Mortgage-backed securities: The unrealized losses on 9 of the Company’s investments in government-sponsored entity mortgage-backed securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2014.

 

Municipal securities: The unrealized losses on 15 of the Company’s investments in obligations of 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 September 30, 2014.

 

The following tables demonstrate the unrealized loss position of available-for-sale securities at September 30, 2014 and December 31, 2013. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

 

		September 30, 2014
		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		$	7,147			$	(57	)		$	6,062			$	(168	)		$	13,209			$	(225	)
Mortgage-backed securities			562				(2	)			4,252				(72	)			4,814				(74	)
Municipal securities			1,546				(52	)			3,744				(91	)			5,290				(143	)
		$	9,255			$	(111	)		$	14,058			$	(331	)		$	23,313			$	(442	)

 

		December 31, 2013
		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		$	9,676			$	(341	)		$	1,897			$	(99	)		$	11,573			$	(440	)
Mortgage-backed securities			5,964				(134	)			1,042				(26	)			7,006				(160	)
Municipal securities			12,253				(683	)			1,185				(120	)			13,438				(803	)
		$	27,893			$	(1,158	)		$	4,124			$	(245	)		$	32,017			$	(1,403	)

 

There are 46 debt securities with fair values totaling $23.3 million considered temporarily impaired at September 30, 2014.  As of September 30, 2014, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

 

The Company realized gains of $108 thousand on sales of securities in the first nine months of 2014. The Company realized $116 thousand of gains during the same period last year.

 

The amortized cost and estimated fair values of investment securities available for sale at September 30, 2014, by contractual maturity are as follows:

 

(Dollars In Thousands)		Amortized Cost				Estimated Fair Value
One year or less		$	255			$	257
Over one through five years			710				720
Over five through ten years			9,687				9,700
Greater than 10 years			45,575				45,985
		$	56,227			$	56,662

 

   

 Note 3. Loans Receivable

 

The major classifications of loans in the consolidated balance sheets at September 30, 2014 and December 31, 2013 were as follows:

 

(Dollars In Thousands)		September 30, 2014				December 31, 2013
Construction loans:
Residential		$	10,517			$	6,768
Land acquisition, development & commercial			22,149				20,904
Real estate:
Residential			82,519				72,934
Commercial			132,691				126,100
Commercial, industrial & agricultural			39,762				42,155
Equity lines			23,523				20,374
Consumer			8,203				8,698
Total			319,364				297,933
Less allowance for loan losses			(3,522	)			(3,721	)
Loans, net		$	315,842			$	294,212

  

The past due and nonaccrual status of loans as of September 30, 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		$	-			$	-			$	-			$	-			$	10,517			$	10,517			$	-
Land acquisition, development & commercial			-				-				-				-				22,149				22,149				-
Real estate:
Residential			141				-				480				621				81,898				82,519				480
Commercial			-				-				152				152				132,539				132,691				784
Commercial, industrial & agricultural			20				-				10				30				39,732				39,762				10
Equity lines			180				-				-				180				23,343				23,523				-
Consumer			1				37				-				38				8,165				8,203				24
Total		$	342			$	37			$	642			$	1,021			$	318,343			$	319,364			$	1,298

 

The past due and nonaccrual status of loans as of December 31, 2013 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		$	-			$	-			$	-			$	-			$	6,768			$	6,768			$	-
Land acquisition, development & commercial			-				-				-				-				20,904				20,904				-
Real estate:
Residential			-				-				931				931				72,003				72,934				707
Commercial			-				-				-				-				126,100				126,100				-
Commercial, industrial & agricultural			270				44				36				350				41,805				42,155				193
Equity lines			203				-				59				262				20,112				20,374				59
Consumer			16				-				30				46				8,652				8,698				30
Total		$	489			$	44			$	1,056			$	1,589			$	296,344			$	297,933			$	989

 

 

 

There were no loans that were past due ninety days or more and still accruing interest as of September 30, 2014. There was one loan of $223 thousand that was past due ninety days or more and still accruing interest at December 31, 2013.

 

Impaired loans, which include TDR’s of $6.8 million, and the related allowance at September 30, 2014, were as follows:

 

September 30, 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			1,282				1,282				-				1,346				49
Real estate:
Residential			480				656				-				480				8
Commercial			9,461				9,461				-				10,680				351
Commercial, industrial & agricultural			495				495				-				498				21
Equity lines			-				-				-				-				-
Consumer			-				-				-				-				-
Total loans with no allowance		$	11,718			$	11,894			$	-			$	13,004			$	429

  

September 30, 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			152				152				146				153				3
Commercial, industrial & agricultural			-				-				-				-				-
Equity lines			-				-				-				-				-
Consumer			-				-				-				-				-
Total loans with an allowance		$	152			$	152			$	146			$	153			$	3

 

Impaired loans, which include TDR’s of $6.3 million, and the related allowance at December 31, 2013, were as follows:

 

December 31, 2013 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			1,550				1,550				-				1,550				67
Real estate:
Residential			412				412				-				415				18
Commercial			9,266				9,266				-				9,365				442
Commercial, industrial & agricultural			283				283				-				733				46
Equity lines			-				-				-				-				-
Consumer			-				-				-				-				-
Total loans with no allowance		$	11,511			$	11,511			$	-			$	12,063			$	573

 

December 31, 2013 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			438				438				163				439				16
Commercial			-				-				-				-				-
Commercial, industrial & agricultural			41				41				10				34				1
Equity lines			-				-				-				-				-
Consumer			-				-				-				-				-
Total loans with an allowance		$	479			$	479			$	173			$	473			$	17

 

 

 

Troubled Debt Restructurings

 

Troubled debt restructurings (“TDR’s”) were comprised of four loans totaling $6.8 million at September 30, 2014.  This compares with $6.3 million in total restructured loans at December 31, 2013.

 

In September 2014, the Company agreed to take ownership via a deed-in-lieu of foreclosure of a commercial property pledged to a loan. The property is included in other real estate owned. The remaining balance is reported as a loan modified as a TDR. The following table presents by class of loan, information related to the loan modified in a TDR during 2014:

 

		Loans modified as TDR's For the nine months ended September 30, 2014
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				1,932				632
Commercial, industrial, agricultural			-				-				-
Equity lines			-				-				-
Consumer			-				-				-
Total Loans			1			$	1,932			$	632

 

For the nine months ended September 30, 2013, no loans were modified as TDR’s.

 

Two of the four loans totaling $6.1 million were performing in accordance with their restructured terms and were not on nonaccrual status at September 30, 2014. The other two loans totaling $656 thousand were on nonaccrual status at the end of the third quarter of 2014.  One of the loans on nonaccrual status at September 30, 2014 was the loan that was modified as a TDR during the third quarter of 2014. The other was a TDR that was classified as a substandard non-accruing loan at September 30, 2014 and 2013. The outstanding balance of this loan was $24 thousand and $39 thousand at September 30, 2014 and September 30, 2013, respectively.

 

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. The three TDR’s, modified prior to 2014, have not had any defaults during the twelve month period ended September 30, 2014, and the TDR modified in 2014 has remained current subsequent to modification. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, if a specific reserve is associated with the loan it may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.

 

  

Note 4. Allowance for Loan Losses

 

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

 

September 30, 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			$	-			$	-			$	100			$	256			$	-			$	256			$	10,517			$	-			$	10,517
Land acquisition, development & commercial			872				-				-				(162	)			710				-				710				22,149				1,282				20,867
Real estate:
Residential			867				(233	)			34				172				840				-				840				82,519				480				82,039
Commercial			1,008				-				-				(65	)			943				146				797				132,691				9,613				123,078
Commercial, industrial & agricultural			327				(50	)			-				4				281				-				281				39,762				495				39,267
Equity lines			385				(136	)			8				137				394				-				394				23,523				-				23,523
Consumer			63				(26	)			2				15				54				-				54				8,203				-				8,203
Unallocated			43				-				-				1				44				-				44				-				-				-
Total		$	3,721			$	(445	)		$	44			$	202			$	3,522			$	146			$	3,376			$	319,364			$	11,870			$	307,494

 

The following table presents, as of December 31, 2013, 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, 2013		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		$	117			$	-			$	-			$	39			$	156			$	-			$	156			$	6,768			$	-			$	6,768
Land acquisition, development & commercial			811				-				-				61				872				-				872				20,904				1,550				19,354
Real estate:
Residential			725				(446	)			81				507				867				163				704				72,934				850				72,084
Commercial			1,054				(88	)			298				(256	)			1,008				-				1,008				126,100				9,266				116,834
Commercial, industrial & agricultural			459				(27	)			-				(105	)			327				10				317				42,155				324				41,831
Equity lines			386				-				2				(3	)			385				-				385				20,374				-				20,374
Consumer			145				(14	)			-				(68	)			63				-				63				8,698				-				8,698
Unallocated			93				-				-				(50	)			43				-				43				-				-				-
Total		$	3,790			$	(575	)		$	381			$	125			$	3,721			$	173			$	3,548			$	297,933			$	11,990			$	285,943

 

 

 

Loans by credit quality indicators as of September 30, 2014 were as follows:

 

(Dollars In Thousands)		Pass				Special Mention				Substandard Accruing				Substandard Nonaccrual				Total
Construction loans:
Residential		$	10,517			$	-			$	-			$	-			$	10,517
Land acquisition, development & commercial			20,851				-				1,298				-				22,149
Real estate:
Residential			77,673				4,366				-				480				82,519
Commercial			128,615				596				2,696				784				132,691
Commercial, industrial & agricultural			39,067				41				644				10				39,762
Equity lines			23,323				-				200				-				23,523
Consumer			8,179				-				-				24				8,203
Total		$	308,225			$	5,003			$	4,838			$	1,298			$	319,364

 

Loans by credit quality indicators as of December 31, 2013 were as follows:

 

(Dollars In Thousands)		Pass				Special Mention				Substandard Accruing				Substandard Nonaccrual				Total
Construction loans:
Residential		$	6,768			$	-			$	-			$	-			$	6,768
Land acquisition, development & commercial			19,336				-				1,568				-				20,904
Real estate:
Residential			67,548				4,455				223				708				72,934
Commercial			121,970				510				3,620				-				126,100
Commercial, industrial & agricultural			41,051				96				815				193				42,155
Equity lines			20,316				-				-				58				20,374
Consumer			8,668				-				-				30				8,698
Total		$	285,657			$	5,061			$	6,226			$	989			$	297,933

 

At September 30, 2014 and December 31, 2013, the Company had no loans classified as Doubtful or Loss.

 

Note 5. Foreclosed Properties

 

Changes in foreclosed properties for the nine months ended September 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			1,520				-				1,520
Writedowns			-				-				-
Sales			(1,399	)			422				(977	)
Balance at the end of the period		$	9,199			$	(513	)		$	8,686

 

Changes in foreclosed properties for the nine months ended September 30, 2013 were as follows:

 

(Dollars In Thousands)		Other Real Estate Owned				Valuation Allowance				Net
Balance at the beginning of the year		$	9,513			$	(575	)		$	8,938
Additions			1,613				-				1,613
Writedowns			-				(377	)			(377	)
Sales			(2,023	)			249				(1,774	)
Balance at the end of the period		$	9,103			$	(703	)		$	8,400

 

 

 

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2014 and December 31, 2013 were as follows:

 

(Dollars In Thousands)		September 30, 2014				December 31, 2013
Residential commercial		$	220			$	-
Residential lots			3,023				3,472
Residential development			423				-
Commercial lots			1,075				1,076
Commercial buildings			3,945				3,595
Total Other Real Estate Owned		$	8,686			$	8,143

 

Note 6. Stock Based Compensation

 

The Company recorded stock based compensation expense of $41 thousand and $29 thousand for the years to date September 30, 2014 and 2013, 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. The Plan authorizes grants of options to purchase up to 550,000 shares of the Company’s authorized but unissued common stock. 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.  No options were granted during the nine months ended September 30, 2014 or 2013. All previously issued options were fully vested by the end of 2012, thus no compensation expense related to stock options was recorded in 2014 or 2013.

 

A summary of option activity under the 2005 stock option plan for the year to date September 30, 2014 is as follows:

 

		Options Outstanding				Weighted Average Exercise Price				Aggregate Intrinsic Value(1)				Weighted Average Contractual Term (years)
Balance at December 31, 2013			391,710			$	9.34
Granted			-				-
Exercised			-				-
Forfeited			(7,150	)			10.00
Balance at September 30, 2014			384,560			$	9.35			$	-				1.80
Exercisable at September 30, 2014			384,560			$	9.35			$	-				1.80

 

(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 September 30, 2014.

 

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 Company’s Board of Directors at 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. 

 

 

 

The restrictions attached to stock issued under the Plan provide for vesting over a five-year period. During the first nine months of 2014, the Company issued 17,268 shares of stock under the Plan, and in the same period of 2013, the Company issued 7,781 shares of stock under the Plan. A summary of the activity for restricted stock awards for the periods indicated is presented below:

 

		For the nine months ended September 30, 2014								For the nine months ended September 30, 2013
		Shares				Weighted-Average Grant Date Fair Value				Shares				Weighted-Average Grant Date Fair Value
Nonvested at beginning of year			27,846			$	5.05				25,896			$	4.76
Granted			17,268				6.25				7,781				5.98
Vested			(7,387	)			5.23				(5,831	)			5.03
Cancelled			-				-				-				-
Nonvested at end of year			37,727			$	5.56				27,846			$	5.05

 

The remaining unamortized compensation expense for restricted stock was $174 thousand at September 30, 2014 and will be recognized over the next 4.4 years. All compensation expense for stock options has been recognized.

 

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 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 consider observable market data (Level 2).

 

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 

(Dollars In Thousands)						Carrying value at September 30, 2014
Description		Balance as of September 30, 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		$	27,192				-			$	27,192				-
Mortgaged-backed securities			11,282				-				11,282				-
Municipal securities			18,188				-				18,188				-

 

 

 

 

(Dollars In Thousands)						Carrying value at December 31, 2013
Description		Balance as of December 31, 2013				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		$	26,284				-			$	26,284				-
Mortgaged-backed securities			15,361				-				15,361				-
Municipal securities			16,277				-				16,277				-

 

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 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: 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 current 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.

 

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 current appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the real estate is further impaired below the appraised value or there is no observable market price, the Company records the real estate as nonrecurring Level 3.

 

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013.

 

(Dollars In Thousands)						Carrying value at September 30, 2014
Description		Balance as of September 30, 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		$	6				-			$	-			$	6
Other real estate owned			8,686				-				3,475				5,211

 

(Dollars In Thousands)						Carrying value at December 31, 2013
Description		Balance as of December 31, 2013				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		$	306				-			$	-			$	306
Other real estate owned			8,143				-				3,745				4,398

 

 

 

At September 30, 2014 and December 31, 2013, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

 

The following tables display quantitative information about Level 3 Fair Value Measurements for September 30, 2014 and December 31, 2013:

 

(Dollars In Thousands)		Quantitative information about Level 3 Fair Value Measurements for September 30, 2014
Assets		Fair Value			Valuation Technique(s)	Unobservable input		Range (Weighted Average)
Impaired loans		$	6		Discounted appraised value	Selling cost			20	%			-				20	%			(20	%)
						Discount for lack of marketability and age of appraisal			0	%			-				0	%			(0	%)
Other real estate owned		$	1,457		Discounted appraised value	Selling cost			0	%			-				6	%			(5	%)
						Discount for lack of marketability and age			4	%			-				33	%			(8	%)
		$	3,754		Internal evaluations	Internal evaluations			10	%			-				10	%			(10	%)

 

(Dollars In Thousands)		Quantitative information about Level 3 Fair Value Measurements for December 31, 2013
Assets		Fair Value			Valuation Technique(s)	Unobservable input		Range (Weighted Average)
Impaired loans		$	306		Discounted appraised value	Selling cost			10	%			-				10	%			(10	%)
						Discount for lack of marketability and age of appraisal			32	%			-				32	%			(32	%)
Other real estate owned		$	1,458		Discounted appraised value	Selling cost			0	%			-				6	%			(5	%)
						Discount for lack of marketability and age			0	%			-				25	%			(9	%)
		$	2,940		Internal evaluations	Internal evaluations			10	%			-				10	%			(10	%)

 

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 aggregated contractual maturities on such time deposits.

 

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At September 30, 2014 and December 31, 2013, management believes the carrying value of federal funds sold approximates estimated market value.

 

Available-for-sale 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.

 

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 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. At September 30, 2014 and December 31, 2013, 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 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, 2014 and December 31, 2013, 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, 2014 and December 31, 2013:

 

(Dollars In Thousands)						Fair value at September 30, 2014
Description		Carrying value as of September 30, 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		$	14,051			$	12,051			$	-			$	2,028			$	14,079
Federal funds sold			111				111				-				-				111
Securities available-for-sale			56,662				-				56,662				-				56,662
Restricted equity securities			2,577				-				2,577				-				2,577
Loans held for sale			317				-				317				-				317
Loans, net			315,842				-				-				316,414				316,414
Bank owned life insurance			3,595				-				3,595				-				3,595
Accrued income			1,777				-				1,777				-				1,777
Financial liabilities
Total deposits			351,477				-				338,622				-				338,622
Short term borrowings			469				-				469				-				469
FHLB borrowings			22,250				-				22,629				-				22,629
Accrued interest payable			295				-				295				-				295

  

(Dollars In Thousands)						Fair value at December 31, 2013
Description		Carrying value as of December 31, 2013				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		$	19,537			$	17,537			$	-			$	2,004			$	19,541
Federal funds sold			738				738				-				-				738
Securities available-for-sale			57,922				-				57,922				-				57,922
Restricted equity securities			2,564				-				2,564				-				2,564
Loans, net			294,212				-				-				293,135				293,135
Bank owned life insurance			3,518				-				3,518				-				3,518
Accrued income			1,877				-				1,877				-				1,877
Financial liabilities
Total deposits			339,770				-				327,514				-				327,514
Short term borrowings			258				-				258				-				258
FHLB borrowings			22,000				-				22,560				-				22,560
Accrued interest payable			286				-				286				-				286

 

 

 

Note 8. Reclassifications Out of Other Comprehensive Income

 

Items not reclassified in their entirety to net income for the three and nine months ended September 30, 2014 and 2013 are as follows:

 

Details about Other Comprehensive Components		Amounts Reclassified from Other Comprehensive Income for the Three Months Ended September 30,							Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)		2014				2013
Available for sale securities
Realized gains on sales of securities held for sale during the period		$	-			$	8		Gains on sales of investment securities
Tax expense related to realized gains on securities sold			-				3		Income tax expense
		$	-			$	5		Net income

 

Details about Other Comprehensive Components		Amounts Reclassified from Other Comprehensive Income for the Nine Months Ended September 30,							Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)		2014				2013
Available for sale securities
Realized gains on sales of securities held for sale during the period		$	108			$	116		Gains on sales of investment securities
Tax expense related to realized gains on securities sold			37				39		Income tax expense
		$	71			$	77		Net income

 

Note 9. Earnings per Common Share

 

The following tables show the weighted average number of shares used in computing earnings per common share and the effect on weighted average number of shares of diluted potential common stock.

 

		For the Three Months Ended September 30,
		2014												2013
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			3,287,567			$	567			$	0.17				3,270,299			$	298			$	0.09
Series C Preferred Stock Dividends							210												180
Effect of dilutive securities:
Convertible preferred stock			2,240,000				-				(0.03	)			2,240,000				-				(0.00	)
Earnings per common share, diluted			5,527,567			$	777			$	0.14				5,510,299			$	478			$	0.09

 

		For the Nine Months Ended September 30,
		2014												2013
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			3,283,962			$	1,783			$	0.54				3,268,646			$	1,158			$	0.35
Series C Preferred Stock Dividends							630												180
Effect of dilutive securities:
Convertible preferred stock			2,240,000				-				(0.10	)			779,487				-				(0.02	)
Earnings per common share, diluted			5,523,962			$	2,413			$	0.44				4,048,133			$	1,338			$	0.33

 

At September 30, 2014 and 2013, stock options to purchase 384,560 and 413,710 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be antidilutive.

 

 

 

Note 10. Capital Requirements

 

In July 2013, the FRB issued revised final rules that make 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 require the Company 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 current 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.  Had the new minimum capital ratios described above been effective as of September 30, 2014, based on management’s interpretation and understanding of the new rules, the Company would have remained “well capitalized” as of such date. 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.

 

Note 11. Subsequent Events

 

On October 23, 2014, 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 December 15, 2014 to preferred shareholders of record November 30, 2014. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date of this filing.

  

 

 

 

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, 2013. 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.

 

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, 2013. 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 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

 

Nine Months Ended September 30, 2014

 

Net income for the nine months ended September 30, 2014 totaled $2.4 million, and was $474 thousand or 24.4% higher than the $1.9 million earned during the same period of 2013, as the result of higher net interest income and noninterest income.

 

For the year to date through September 30, 2014, net interest income was $10.9 million, compared to $10.2 million earned during the same period in the prior year. The $697 thousand or 6.8% improvement was fueled by the expansion of earning assets. The level of average earning assets for the first nine months of 2014 was $28.0 million above the prior year. Average loans expanded by $32.4 million during this time and were funded primarily by the growth of $22.2 million in average deposits. Average investments were $3.3 million less year to date September 30, 2014 than the same period last year, as management directed some of the funds from sales, payments and maturities to the expansion of the loan portfolio. Average Federal Home Loan Bank advances were $2.4 million more for the first nine months of 2014 compared to the same period last year and were another source of funding for loan expansion.

 

The provision for loan losses for the nine months ended September 30, 2014 and 2013 was $202 thousand and $125 thousand, respectively. Higher recoveries in 2013 replenished the allowance for loan losses and reduced the amount of provision last year.

 

Noninterest income totaled $1.3 million for the first nine months of 2014, up $252 thousand or 23.2% from the same period last year. Growth in the number of core deposit accounts resulted in increased service charge income on deposit accounts, and ATM and interchange income. In total these items were up $170 thousand over last year. The Company purchased life insurance policies in the fourth quarter of 2013 on certain key executives to provide the funding for the supplemental retirement benefit offered to these individuals. These policies are recorded at the cash surrender value of the life insurance contracts. Increases in the cash surrender value of $77 thousand, during the nine months ended September 30, 2014, were included in other income. HomeTown Investments began generating revenue in the second quarter of 2014, and also contributed $47 thousand to other income. Lower mortgage income offset some of these favorable variances, due to the reduction in mortgage refinancing, a nationwide trend that began in the second half of 2013.

 

Year to date September 30, 2014, total noninterest expense was $8.5 million, $270 thousand or 3.3% more than the $8.3 million recorded in the same period last year. The increase resulted primarily from the expansion of business in the current year compared to the prior year. The Company built a new branch at the site of the Salem ATM and opened the branch for business on July 28, 2014, which accounted for $139 thousand or 51.5% of the $270 thousand increase over the prior year. Salaries and employee benefits through September 30, 2014 were $4.3 million compared to $4.1 million last year. The $231 thousand or 5.7% increase was due to several factors. Staffing of the new Salem branch accounted for $67 thousand of the increase. The expense for the Supplemental Retirement Plan for certain key officers mentioned in the previous paragraph was $78 thousand year to date September 30, 2014 compared to none for the same period in 2013. The remainder of the increase in salaries reflects annual cost of living and merit pay increases and higher benefit costs in the current year. Occupancy and equipment expense totaled $1.1 million through September 30, 2014, an increase of $156 or 16.0% over last year. Again expansion of operations accounted for most of the increase. At the end of 2013, the New River Valley operations were relocated to a new, larger building. The New River Valley operations and the Salem branch accounted for $101 thousand or 64.9% of the increase in this category of noninterest expense.

 

Noninterest expense included favorable variances which offset some of the higher costs. Through September 20, 2014, the Company had recognized $5 thousand in gains from the sale of other real estate owned compared to $351 thousand of losses for the same period last year. The prior year losses were mainly due to writedowns totaling $321 thousand on two large other real estate owned properties as the result of new appraisals last year. FDIC insurance expense was $202 thousand below the prior year due primarily to a decreased rate.

 

Three Months Ended September 30, 2014

 

The Company recorded net income of $777 thousand for the third quarter of 2014, compared to $772 thousand for the same quarter a year ago. Net income available to common stockholders was $567 thousand for the three months ended September 30, 2014, or $269 thousand more than the $298 thousand available for the same period last year. Series A and B preferred stock were redeemed on September 24, 2013. The remaining discount related to the redeemed shares was fully amortized in 2013, resulting in accretion of $102 thousand in the third quarter of 2013 versus none in the third quarter of 2014. The fact that during the third quarter of 2013, dividends were paid to both Series A and B preferred shareholders’ as well as Series C preferred shareholders further reduced the earnings available to common shareholders. In the third quarter of 2014, the Company incurred $157 thousand in non-recurring expenses related to its subsidiary Hometown Bank's lawsuit action against HomeTrust Bank of Asheville, N.C. On August 19, 2014 the two companies agreed to dismiss the actions each had against the other with each party being responsible for their own expenses. 

 

Net interest income was $3.7 million for the third quarter of 2014, and has increased every quarter in the current year. Net interest income was $3.5 million for the same quarter last year. The favorable variance in the third quarter’s net interest income compared to the same quarter in the prior year was due largely to a higher volume of earning assets. Average earning assets for the third quarter of 2014 were $386 million, $30.3 million higher than the $356 million average for the third quarter of 2013. Increased activity in loan originations fueled the expansion. The increase in average loans was funded primarily by core deposit growth. Average deposits for the third quarter of 2014 were $351 million, an increase of $17.4 million over total average deposits of $334 million for the same quarter in 2013. Federal Home Loan Bank advances and deposits with banks provided the remaining funds for loan growth. Average Federal Home Loan Bank advances were $25.9 million for the three months ended September 30, 2014, $6.9 million higher than the same period last. Average deposits with banks were $3.6 million less for the third quarter of 2014 compared to the third quarter of 2013.

 

 

 

The tax equivalent net interest margin was 3.88%, 3.86%, and 3.91% for the three months ended, September 30, 2014, June 30, 2014, and September 30, 2013, respectively. The 2 basis point improvement for the third quarter compared to the previous quarter, was the result of the decline in the cost of funds exceeding the decline in earning asset yields. The 3 basis point decline in the net interest margin for the third quarter 2014 compared to the same quarter a year ago, reflects the drop in the yield on loans, as new loans and renewals are at lower current market rates. The weighted average maturity of the fixed rate portion of the portfolio has remained relatively unchanged in 2014. Maintaining a relatively short term presents pricing opportunities in the future. The impact of lower yields on earning assets has been partially mitigated by lower costs of funds. The main factor contributing to lower fund costs was a favorable change in mix to a higher concentration of lower cost deposit products, including the strategic use of brokered CD’s as a source of liquidity. Because of the low interest rate environment over the past few years, demand deposits at commercial banks grew at an unprecedented rate; this trend has begun to reverse itself, and could accelerate as shorter term rates rise. At the October 29, 2014 Federal Open Market Committee meeting, the Committee reaffirmed that changes to interest rates are contingent on progress towards its two goals, price stability and maximum employment, but for the first time, said rates could rise sooner if the economy progresses faster than expected. Many economists anticipate the central bank will raise short-term interest rates sometime in the second or third quarter of 2015. Management expects the combination of lower loan yields and possibly higher deposit costs in the future to further compress the net interest margin in future quarters.

 

Based on the allowance for loan loss calculation and analysis performed at each respective quarter end, no provision for loan losses was recorded in the third quarter of 2014 or 2013

 

During the three months ended September 30, 2014, noninterest income totaled $501 thousand, $183 thousand or 57.5% higher than the same period in the prior year. Service charge income on deposit accounts and ATM and interchange income has risen for four consecutive quarters and reflects the growth of core deposit accounts; and totaled $231 thousand for the third quarter of 2014, an increase of $70 thousand or 43.5% over the same quarter in 2013. Mortgage loan brokerage fees for the third quarter of 2014 were $102 thousand, compared to $17 thousand for the previous quarter, and $62 thousand for the same quarter a year ago, the increase in fees is due to resurgence in mortgage lending. Despite recent improvements, the Mortgage Bankers Association (MBA) still anticipates originations for 2014 to be less than 2013. However, the MBA's most recent forecast predicts originations for 2015 to exceed 2014. Increases in the cash surrender value of life insurance on certain key executives added $26 thousand to other income, during the three months ended September 30, 2014. HomeTown Investments began generating revenue in the second quarter of 2014, and also contributed $21 thousand to other income in the third quarter.

 

Noninterest expense totaled $3.1 for the three months ended September 30, 2014, an increase of $455 thousand or 17.3% over the same period in 2013. Professional fees were $157 thousand higher than the prior year due primarily to $126 thousand in legal fees related to the unfair competition claim brought against HomeTrust Bank, which was settled favorably in August 2014. Increases in other categories primarily reflect the Company’s growth.

 

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 September 30, 2014, the Company had total assets of $418 million, up $15.5 million or 3.8% over total assets of $402 million at December 31, 2013.   At the end September 2014, net loans had increased $21.6 million or 7.4% over year end 2013. Of the total increase in net loans of $21.6 million since year end 2013, $20.1 million occurred during the first half of 2014. Loan growth was slower in the third quarter but is expected to improve in the fourth quarter of 2014.

 

The Company’s liabilities at September 30, 2014 totaled $376 million compared to $363 million at December 31, 2013, an increase of $12.8 million or 3.5%.   Deposits have risen $11.7 million or 3.4% since year end 2013, due largely to the expansion of operations in the New River Valley and Salem. Interest bearing deposits were $10.8 million or 3.7% higher at the end of September 2014 compared to year end 2013, due to increases in consumer core deposits, and the strategic use of brokered deposits as one of the sources for loan growth. Noninterest bearing deposits increased $947 thousand or 2.0% during the same time.

 

At September 30, 2014 and December 31, 2013, the Company had stockholders’ equity of $42.2 million and $39.5 million, respectively, an increase of $2.7 million or 6.9%. The change in stockholders’ equity in the first nine months of 2014 was mainly the result of net income of $2.4 million, partially offset by the payment of $630 thousand of dividends on preferred stock. The $886 thousand change in accumulated other comprehensive income (loss) also contributed to the overall increase in stockholders’ equity.  

 

Management believes the Company has sufficient capital to fund its operations. At September 30, 2014, 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. The Company has multiple credit lines available as an alternative source of funding.

 

 

 

 Non-performing Assets

 

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

 

(Dollars in thousands)		September 30, 2014				December 31, 2013
Real Estate:
Construction and land development		$	-			$	-
Residential 1-4 families			480				707
Commercial real estate			784				-
Commercial loans			10				193
Equity lines			-				59
Loans to individuals			24				30
Total nonperforming loans			1,298				989
Other real estate owned			8,686				8,143
Total nonperforming assets, excluding performing restructured loans			9,984				9,132
Performing restructured loans			6,132				6,278
Total nonperforming assets, including performing restructured loans		$	16,116			$	15,410

 

During the nine months ended September 30, 2014, there were $2.3 million of additions to nonperforming loans, of which $1.5 million were subsequently foreclosed and included in other real estate owned at quarter end. Other real estate owned sold during 2014 totaled $977 thousand.

 

Troubled debt restructurings (“TDR’s”) were comprised of four loans totaling $6.8 million at September 30, 2014.  Two of the four loans were included in impaired loans, but were performing in accordance with their restructured terms and were not on nonaccrual status.  The remaining $656 thousand were on nonaccrual status at the end of the third quarter of 2014.  This compares with $6.3 million in total restructured loans at December 31, 2013.  For the nine months ended September 30, 2014, one loan was modified as a TDR. For the year 2013, no loans were modified in a TDR.

 

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2014 and December 31, 2013 are included in Note 5, and the activity in other real estate owned for the first nine months of 2014 and 2013 is also included in Note 5.

 

Gains on sales of other real estate owned totaled $5 thousand through the end of the third quarter of 2014, compared to gains on sales of other real estate of $26 thousand for the same period of 2013. There were no writedowns of other real estate owned in the first nine months of 2014. The first nine months of 2013 included $377 thousand of writedowns.

 

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 $146 thousand and $173 thousand at September 30, 2014 and December 31, 2013, respectively.  Impaired loans totaled $11.9 million and $12.0 million at September 30, 2014 and December 31, 2013, respectively.    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 $202 thousand in the first nine months of 2014 compared to $125 thousand in 2013.    Unallocated reserves were $44 thousand at September 30, 2014 and $43 thousand at December 31, 2013. The percentage of the allowance for loan losses to total loans was 1.10%, and 1.25% at September 30, 2014, and December 31, 2013, respectively.  The percentage of the allowance for loan losses to total loans declined from December 31, 2013 to September 30, 2014 because of improvement in the historical net charge off ratio.  The increase in nonperforming assets since December 31, 2013 was due primarily to one loan that had been classified as Substandard and impaired for several years. As an impaired loan, the credit was individually evaluated and the collateral was deemed sufficient with no specific reserve for loan losses. The loan was added to nonaccruals in the second quarter of 2014. The bank foreclosed on a property to satisfy part of the credit and modified the remaining debt as a TDR in the third quarter of 2014.

 

The Federal Reserve’s most recent report of economic activity, the Beige Book, described growth as modest to moderate at a pace similar to that noted in the previous report.

 

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 and securities available for sale, net of securities pledged and cash balance requirements totaled $59.0 million and $63.1 million at September 30, 2014 and December 31, 2013, respectively.

 

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 September 30, 2014, the Company had borrowed $22.3 million of the $35.1 million of lendable collateral value, leaving $12.8 million of unused credit immediately available. The Company also has an $8 million guidance line of credit to borrow against securities. In addition, the Company had $18.5 million of fed funds lines of credit available at September 30, 2014. At September 30, 2014, there were no advances on the fed funds or guidance lines.

 

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.

 

As of September 30, 2014, the most recent notification from the Federal Reserve Bank, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

 

The following are the Company’s and Bank’s capital ratios:

 

September 30, 2014		Actual								Minimum Capital Requirement								Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated		$	45,483				13.5	%		$	27,050				8.0	%		N/A				N/A
HomeTown Bank		$	44,848				13.3	%		$	27,050				8.0	%		$	33,813				10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		$	41,961				12.4	%		$	13,525				4.0	%		N/A				N/A
HomeTown Bank		$	41,326				12.2	%		$	13,525				4.0	%		$	20,288				6.0	%
Tier I Capital (to Average Assets)
Consolidated		$	41,961				10.0	%		$	16,814				4.0	%		N/A				N/A
HomeTown Bank		$	41,326				9.8	%		$	16,814				4.0	%		$	21,017				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, 2014 outstanding commitments to extend credit including letters of credit were $76.8 million. There are no commitments to extend credit on impaired loans.

 

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

 

 

 

Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company is currently assessing the impact that ASU 2014-01 will have on its consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently assessing the impact that ASU 2014-04 will have on its consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated financial statements.

 

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

 

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

 

 

 

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

 

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

 

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

 

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

 

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, 2014 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.

 

On June 27, 2014, HomeTrust Bank of Ashville, N.C., filed a lawsuit action against HomeTown Bank in the United States District Court for the Eastern District of Virginia seeking a declaratory judgment that their service mark is valid and that they can use it anywhere in the United States.

 

On July 18, 2014, HomeTown Bank, filed a lawsuit action against HomeTrust Bank of Ashville, N.C. in the United States District Court for the Western District of Virginia seeking injunctive relief and damages for unfair competition and cybersquatting.

  

HomeTown Bankshares Corporation (the “Company”), announced on August 19, 2014 the entry of its wholly owned subsidiary Roanoke, Virginia based HomeTown Bank into an Agreement with HomeTrust Bank, a Federal Saving Bank headquartered in Asheville, North Carolina whereby the two Companies agreed to dismiss the actions each had against the other in the United States District Courts for the Eastern and Western Districts of Virginia. Each party is responsible for their own attorneys’ fees and litigation expenses. The Company incurred $126 thousand in legal fees defending their position and $31 thousand in additional marketing expense.

 

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 September 30, 2014, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2014, and December 31, 2013; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014, and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014, and 2013;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; 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: November 14, 2014	By:	/S/ SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer
Date: November 14, 2014	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, 2014, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2014, and December 31, 2013; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014, and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014, and 2013;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; 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.

 

29