HomeTown Bankshares Corp - FORM 10-K

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - HomeTown Bankshares Corp	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - HomeTown Bankshares Corp	ex31-1.htm
EX-32 - EXHIBIT 32 - HomeTown Bankshares Corp	ex32.htm
EX-21 - EXHIBIT 21 - HomeTown Bankshares Corp	ex21.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission file number 333-158525

HomeTown Bankshares Corporation

(Exact name of 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, including area code (540) 345-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $5.00 per share Par Value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2015. $23,949,476, based on $7.75 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date 3,373,259 shares outstanding as of March 30, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporation’s Proxy Statement for the 2016 Annual Meeting of Shareholders have been incorporated by reference into Part III.

HOMETOWN BANKSHARES CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

		Page
PART I

Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	7
Item 2.	Properties	7
Item 3.	Legal Proceedings	8
Item 4.	Mine Safety Disclosures	8

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6.	Selected Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8.	Financial Statements and Supplementary Data	25
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
Item 9A.	Controls and Procedures	61
Item 9B.	Other Information	61

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	61
Item 11.	Executive Compensation	62
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62
Item 13.	Certain Relationships and Related Transactions, and Director Independence	62
Item 14.	Principal Accounting Fees and Services	62

PART IV
Item 15.	Exhibits, Financial Statement Schedules	63

PART I

ITEM 1. BUSINESS.

Overview and History

General

HomeTown Bankshares Corporation (the “Company”, “HomeTown Bankshares”) was incorporated in the Commonwealth of Virginia on December 8, 2008. On September 4, 2009, the Company acquired all of the outstanding shares of HomeTown Bank in a one for one exchange of stock.

The Company is authorized as a bank holding company. The holding company structure provides greater flexibility than a bank standing alone because it allows expansion and diversification of business activities through subsidiaries or through acquisitions. HomeTown Bankshares Corporation’s business is conducted through its wholly-owned subsidiary, HomeTown Bank.

HomeTown Bank

Hometown Bank (the “Bank”) is a Virginia banking corporation headquartered in Roanoke, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 2004 and began banking operations in November 2005. The Bank was organized to engage in general retail and commercial banking business.

The Bank opened for business on November 14, 2005 and was capitalized by more than 2,000 shareholders who wanted a new local bank dedicated to customer service. These investors provided the initial customer base and are integral to the success of the Bank. Management believes that the key to the Bank’s success lies in providing Bank customers with personalized service from experienced banking professionals while providing innovative, highly competitive and convenient products and services that meet their banking needs. In 2013 the Bank began operating a mortgage joint venture with another entity. The Bank’s ownership interest in HomeTown Residential Mortgage, LLC is 49%. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and larger companies. The Bank provides a full range of services to meet the financial needs of its customers and strives to provide its customers with innovative products while maintaining the prompt response and the high level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area. Management believes that the combination of local ownership and size allows the Bank to offer services and products specifically tailored to the needs of the community. The Bank’s Principal Office is located at 202 S. Jefferson Street, Roanoke, Virginia. The Bank maintains its primary website at www.hometownbankva.com. Other websites, the Bank uses are www.newriverbankva.com, www.switch2hometown.com, www.switchtohometown.com, www.switchtohometown.net, www.switchtohometownbank.com, www.switchtonewriverbank.com, www.hometownbank.com and www.hometownbanktix.com.

Principal Products of the Bank

The Bank offers a full range of banking services to small and medium-size businesses, real estate investors and developers, private investors, professionals and individuals. In addition to its main office, the Company has full-service 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, at 852 West Main Street.

Deposit Services. The Bank offers a full range of deposit services that are typically available in most banks, savings banks and credit unions including checking accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. From the beginning, the Bank has focused on convenience, innovation, and value. The transaction accounts and time certificates are tailored to the Bank’s market area at rates competitive to those offered in the area. In addition, the Bank offers its customers Individual Retirement Accounts (IRAs). All deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowed by law (generally, $250,000 per depositor, subject to aggregation rules). The Bank solicits such accounts from individuals, businesses, and associations and organizations.

The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) . CDARS and ICS enable the Bank to offer our deposit customers access to FDIC insurance in amounts exceeding the existing FDIC limit. This permits our institution to better attract and retain large deposits from businesses, nonprofit organizations, individuals and other customers that require an assurance of safety.

Lending Services. The Bank also offers a full range of short-to-medium term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans and lines of credit include secured and unsecured loans for financing automobiles, home improvements, education and personal investments. Additionally, the Bank originates fixed and floating-rate mortgage loans and real estate construction and acquisition loans.

Consumer Residential Mortgage Origination. The Bank has expanded their residential mortgage origination operations over the last few years. Initially, the Bank originated loans as a representative for mortgage companies. Then, in February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office. In 2013 HomeTown Bank entered into a joint venture agreement with a mortgage company as 49% owner of HomeTown Residential Mortgage, LLC. The new entity began operations at the end of 2013, absorbing the Bank’s mortgage office employees and continued working from the Colonial Avenue office. The mortgage office operates under the name HomeTown Mortgage and coordinates the Bank’s existing mortgage services and offers mortgages, refinancing, and other services. Loans originated are conforming home mortgages in its market area, as defined below. As part of the Bank’s overall risk management strategy, loans originated and closed by the mortgage office are pre-sold to major national mortgage banking or financial institutions. In addition to creating customer relationships and the opportunity to sell other products and services, the bank receives fee income for this service.

Investment Services. HomeTown Investments, opened in April 2013, 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 LPL Financial, Member FINRA/SIPC. HomeTown Investments is a subsidiary of the Bank. Products and services made available through LPL Financial 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.

Private Wealth. At the end of 2015, the Bank began offering personalized, banking solutions to work with customers to clarify financial goals and bring together professionals to satisfy their investment, trust, credit and other financial needs.

Revenue from wealth management activities is comprised mostly of fees based upon the market value of the accounts under administration as well as commissions on investment transactions.

Other Services. Other services offered by the Bank include safe deposit boxes, traveler’s checks, direct deposit of payroll and social security checks, automatic drafts for various accounts, overdraft protection, check cards, credit cards and merchant card services. The Bank also has become associated with a shared network of automated teller machines (ATMs) that may be used by Bank customers throughout the world. The Bank intends to introduce new products and services as permitted by the regulatory authorities or desired by the public. The Bank remains committed to meeting the challenges that require technology. The Bank provides its customers with access to the latest technological products, such as internet banking, including on-line bill pay and mobile banking. The services allow customers to handle routine transactions using the internet at the Bank’s website www.hometownbankva.com, or on their mobile phones.

Market Area

The Bank’s market area primarily consists of the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Bedford, Franklin and Montgomery, Virginia. Total population in the market area equals approximately 400,000. The area is serviced by one daily newspaper, at least 6 weekly, multi-weekly or bi-weekly newspapers and a number of radio and television stations providing diverse media outlets. The City of Roanoke and Roanoke County, the location of three of the Bank’s offices, has the largest population base, with approximately 190,000 persons. The Roanoke market area is diversified by industry groups with services, retail trade, manufacturing, construction, transportation and utilities, finance, insurance and real estate. Roanoke is a regional center for banking, medicine and the legal and business professional community. Carilion Clinic, Veterans Affairs, Kroger, and HCA Virginia Health System are among Roanoke’s largest private employers. Other major employers are the local school boards, municipal governments, and universities including Virginia Tech, Roanoke College, and Hollins University.

Employees

As of December 31, 2015, the Company had 96 employees, including 94 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements, and relations with employees are considered positive.

Governmental Monetary Policies

The earnings and growth of the Company are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board implements national monetary policy by its open market operations in United States government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial institutions’ deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits. Management of the Company is unable to predict the effect of possible significant changes in monetary policies upon the future operating results of the Company.

Competition

The Company competes as a financial intermediary with other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Roanoke market area and elsewhere. Many of the Company’s nonbank competitors are not subject to the same extensive federal regulations that govern federally insured banks and state regulations governing state chartered banks. As a result, such nonbank competitors may have certain advantages over the Company in providing certain services.

Virginia law permits statewide branching by banks. Consequently, the Company’s market area is a highly competitive, highly branched banking market. Competition, for loans to individuals, small businesses, and professional concerns, is keen in the Company’s target market, and pricing is important. Most of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services, such as extensive and established branch networks and trust services that the Company is not currently providing. Moreover, larger institutions operating in the Roanoke market area have access to borrowed funds at a lower cost than are presently available to the Company. Deposit competition is strong and comes from institutions in the market, U.S. Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors, among other sources.

Cyber Security

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.

Supervision and Regulation

HomeTown Bankshares Corporation

HomeTown Bankshares is a bank holding company organized under the Federal Bank Holding Company Act of 1956 (“BHCA”), which is administered by the Federal Reserve Board. HomeTown Bankshares is required to file an annual report with the Federal Reserve Board and may be required to furnish additional information pursuant to the BHCA. The Federal Reserve Board is authorized to examine HomeTown Bankshares and its subsidiary.

The Bank Holding Company Act. Under the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve Board has found those activities to be incidental to banking. Bank holding companies also may not acquire more than 5% of the voting shares of any company engaged in nonbanking activities. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve Board before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares.

Virginia State Corporation Commission. All Virginia bank holding companies are required to register with the Virginia State Corporation Commission (the “Commission”). HomeTown Bankshares is required to report to the Commission with respect to financial condition, operations and management. The Commission may also make examinations of any bank holding company and its subsidiaries.

The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits significant combinations among different sectors of the financial services industry, allows for expansion of financial service activities by bank holding companies and offers financial privacy protections to consumers. GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. GLBA permits affiliations between banks and securities firms in the same holding company structure, and it permits financial holding companies to directly engage in a broad range of securities and merchant banking activities. HomeTown Bankshares is not a financial holding company.

The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (“SOX”) enacted sweeping reforms of the federal securities laws intended to protect investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including HomeTown Bankshares. SOX creates increased responsibilities for chief executive officers and chief financial officers with respect to the content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission rules focused increased scrutiny by internal and external auditors on HomeTown Bankshares’ systems of internal controls over financial reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and criminal penalties for violations of securities laws.

Capital Requirements. The Federal Reserve Board has adopted risk-based capital guidelines that are applicable to HomeTown Bankshares. The guidelines provide that the Company must maintain a minimum ratio of 8% of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit). At least half of total capital must be comprised of Tier 1 capital, for a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines of 4% for banks that meet certain specified criteria. The leverage ratio is the ratio of Tier 1 capital to total average assets, less intangibles. HomeTown Bankshares is expected to be a source of capital strength for its subsidiary bank, and regulators can undertake a number of enforcement actions against HomeTown Bankshares if its subsidiary bank becomes undercapitalized. HomeTown Bankshares’ bank subsidiary is well capitalized and fully in compliance with capital guidelines. However, regulatory capital requirements relate to earnings and asset quality, among other factors. Bank regulators could choose to raise capital requirements for banking organizations beyond current levels.

On July 2, 2013, the Federal Reserve Board of Governors approved the final Basel III risk-based capital rule. This rule aims to improve the quality and quantity of capital for all banking organizations and provides a new regulatory framework for U.S. banking organizations which is consistent with international standards. Community banking organizations first became subject to the final Basel III rule on January 1, 2015. Thereafter begins a phase-in period through January 1, 2019. The new rule implements higher minimum capital requirements and emphasizes the use of common equity through the introduction of a new capital ratio: common equity tier 1 (CET1). In addition, the new rule establishes stricter eligibility for capital instruments included in CET1, and additional tier 1 capital or tier 2 capital. The rule introduces the requirement of a new 2.5% capital conservation buffer, to be phased in beginning on January 1, 2016, and ending on January 1, 2019. Banking organizations without other supervisory issues that wish to distribute capital freely, such as in the payment of dividends for example, must maintain the new capital conservation buffer.

The new rule emphasizes common equity as the preferred capital instrument and limits the inclusion of intangible assets, including mortgage servicing assets and deferred tax assets in the capital of financial institutions. The new capital rule addresses the Dodd-Frank Act prohibition on reliance on external credit ratings specified in the regulations of the federal banking agencies. Consequently, the new capital rule replaces the previous credit-rating-based risk-weighting approach of certain assets with a simplified supervisory formula approach.

Emergency Economic Stabilization Act of 2008. On October 14, 2008, the U. S. Treasury announced the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008. Under the program, the Treasury was authorized to purchase up to $250 billion of senior preferred shares in qualifying U.S. banks, savings and loan associations, and bank and savings and loan holding companies. The amount of TARP funds was later increased to $350 billion.

American Recovery and Reinvestment Act of 2009. The ARRA was enacted in 2009 and includes a wide range of programs to stimulate economic recovery. In addition, it also imposed new executive compensation and corporate governance obligations on TARP Capital Purchase Program recipients. Because HomeTown Bankshares participated in TARP it was required to comply with these requirements.

The Dodd-Frank Act

The financial regulatory reform legislation “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) was signed into law on July 21, 2010. The Dodd-Frank Act implements financial regulatory reform across the entire financial landscape and has far-reaching provisions including among other things:

•

Creates a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. As a smaller institution, most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the Federal Reserve Board and to the Bank by the FDIC.

•

Applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

•

Changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminates the ceiling on the size of the Deposit Insurance Fund and increases the floor of the size of the Deposit Insurance Fund.

•

Requires loan originators to retain 5 percent of any loan sold or securitized, unless it is a “qualified residential mortgage”, which must still be defined by the regulators. Federal Housing Administration, Veterans Affairs and Rural Housing Service loans are specifically exempted from the risk retention requirements.

•

Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders that apply to all public companies not just financial institutions.

•

Makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

•

Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

•

Amends the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While the Company is not directly subject to these rules for as long as the Company’s assets do not exceed $10 billion, the Company’s activities as a debit card issuer may be indirectly impacted, potentially requiring the Company to match new lower fee structures implemented by larger financial institutions in order to remain competitive.

The Dodd-Frank Act is the largest piece of financial legislation ever passed, exceeding 2,000 pages in length. Many provisions of the Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers, or the financial industry as a whole. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

HomeTown Bank

The Bank is under the supervision of, and subject to regulation and examination by, the Federal Reserve Board and the Bureau of Financial Institutions of the Virginia State Corporation Commission. The Bank is also covered by deposit insurance through the FDIC and is subject to their regulations. As such, the Bank is subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and establishment of branch offices.

Deposit Insurance. HomeTown Bank has deposits that are insured by the FDIC. The FDIC maintains a Deposit Insurance Fund (“DIF”) that is funded by risk-based insurance premium assessments on insured depository institutions. Assessments are determined based upon several factors, including the level of regulatory capital and the results of regulatory examinations. The FDIC may adjust assessments if the insured institution’s risk profile changes or if the size of the DIF declines in relation to the total amount of insured deposits. It is anticipated that assessments will increase in the future due to the anticipated growth of the Bank.

On April 1, 2011, the deposit insurance assessment base changed from total deposits to average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act, which also requires the FDIC to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depositary institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act permanently increased the maximum deposit insurance amounts for banks, savings institutions and credit unions to $250,000 per depositor.

Capital Requirements. The same capital requirements that are discussed above with relation to HomeTown Bankshares are applied to HomeTown Bank by the Federal Reserve Board. Federal Reserve Board guidelines provide that banks experiencing internal growth or making acquisitions are expected to maintain strong capital positions well above minimum levels, without reliance on intangible assets. Also, capital requirements can be increased based on earnings and asset quality concerns as well as other issues.

Mergers and Acquisitions. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve Board before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorizes the Federal Reserve Board to permit adequately capitalized and adequately managed bank holding companies to acquire all or substantially all of the assets of an out-of-state bank or bank holding company, subject to certain conditions, including nationwide and state concentration limits. Banks also are able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia law permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

Community Reinvestment Act (“CRA”). The Company is also subject to the requirements of the CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to a number of assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open branches.

Volcker Rule. The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests over certain thresholds in private equity and hedge funds. Final rules implementing the Volcker Rule were adopted on December 10, 2013. The final rules require entities to establish internal compliance programs which may include making regular reports about those activities to regulators. The final rules were effective April 1, 2014, with full compliance being phased in over a period which will end on July 21, 2016. The Volcker Rule has been subject to much commentary from the banking industry and the Company continues to evaluate the impact the Rule will have on the industry and the Company in particular.

Safety and Soundness. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.

Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a limited partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions, including the filing of misleading or untimely reports with regulatory authorities, may provide the basis for enforcement action.

USA Patriot Act. The USA Patriot Act became effective on October 26, 2001, and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. Interim rules implementing the USA Patriot Act were issued effective March 4, 2002. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions.

Consumer Laws and Regulations. There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. HomeTown Bank is required to comply with these laws and regulations in its dealing with customers.

ACCESS TO FILINGS

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Also, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are posted on the Company’s website at http://www.hometownbankva.com as soon as reasonably practical after filing electronically with the SEC.

Executive Officers of the Registrant

The following table shows the Company’s executive officers as of March 30, 2016 and their areas of responsibility. The executive officer biographies follow the table

Name	Age	Position
Susan K. Still	62	President & CEO
Charles W. Maness, Jr.	59	Executive Vice President & CFO
William C. Moses	60	Executive Vice President & Chief Credit Officer
Terrance E. O’Shaughnessy	60	Executive Vice President & Chief Lending Officer
Laurie C. Hart	54	Executive Vice President & Chief Retail and Deposit Officer

Susan K. Still, has served as President and Chief Executive Officer of the Company since May 2008. Ms. Still is also a member of the Company’s board of directors and served as the Bank’s Chief Lending Officer from November 2005 to May 2008.

Charles W. Maness, Jr., has served as Executive Vice President and Chief Financial Officer of the Company since May 2006.

William C. Moses, has served as Executive Vice President and Chief Credit Officer of the Company since November 2005.

Terrance E. O’Shaughnessy, has served as Executive Vice President and Chief Lending Officer of the Company since June 2008 and previously served as a commercial lender for the Company since June 2007.

Laurie C. Hart, has served as Executive Vice President and Chief Retail and Deposit Officer of the Company since November 2008 and previously served Senior Vice President and Deposit Officer since November 2007.

ITEM 1A. RISK FACTORS.

Not Required.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not Required.

ITEM 2. PROPERTIES.

As of March 30, 2016, the Company through its wholly owned subsidiary HomeTown Bank (the “Bank”), conducted its business from the following six locations: i) 202 S. Jefferson Street Roanoke, Virginia (the “Downtown Office”), which also serves as the Bank’s main office and operations processing center; ii) a branch office located at 13400 Booker T. Washington Highway, Moneta, Virginia (the “Smith Mountain Lake Office”); iii) a branch office at 4225 Colonial Avenue, Roanoke, Virginia (the “Colonial Avenue at 419 Office”); iv) a branch office at 3521 Franklin Road, Roanoke, Virginia (the “South Roanoke Office”); v) a branch office at 2950 Market Street, Christiansburg, Virginia (the “Christiansburg Office”); vi) a branch office at 852 West Main Street, Salem, Virginia (the “Salem Office”).

The Downtown Office. The Bank leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia. The original lease expired on December 31, 2015, which provided an option to extend the lease for two additional five-year periods. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for one additional ten-year tem at expiration. The Downtown Branch opened on November 14, 2005.

The Smith Mountain Lake Office. The Bank purchased the Smith Mountain Lake branch on February 14, 2006 and received regulatory approval and opened the office on May 8, 2006.

The Colonial Avenue at 419 Office. The Bank purchased the property for the Colonial Avenue at 419 office on August 31, 2006 and received regulatory approval and opened the Colonial Avenue at 419 Branch on March 22, 2007. In February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office.

The South Roanoke Office. The Bank leases real property and improvements thereto located at 3521 Franklin Road, Roanoke, Virginia. The Bank received regulatory approval and opened a branch at this location on July 9, 2007. The initial lease was for a period of ten years from August 1, 2006. The lease expires on July 31, 2016 and provides an option to extend the lease for two additional five-year periods.

The Christiansburg Office. The Bank purchased property at 2950 Market Street, Christiansburg on May 26, 2010. The Bank broke ground in December 2012 on a new 9,000 square foot branch. At the end of 2013 the Bank relocated their New River Valley branch operations and mortgage and administrative operations to the new building. The larger facility enables the Bank to meet the growing needs of its customers in the New River Valley and to attract new business. This office operates under the name “NewRiver Bank, a branch of HomeTown Bank”. The Bank began operations in the New River Valley market in 2008. The leases for the previous locations, at 1540 Roanoke Street and 1655 Roanoke Street, Christiansburg, expired in 2013.

Salem Office. The Bank purchased property at 852 West Main Street, Salem on September 2, 2011. A stand-alone fully operational ATM was completed and put into service April 15, 2013, and on July 28, 2014, a full service branch office opened at this location.

Market Square ATM. The Bank leases space at 1 Market Square, Roanoke for a cash dispensing ATM. The ATM was put into operation May 10, 2013, and is located at the newly renovated Center in the Square building, a cultural hub in downtown Roanoke.

Operations Center. Due to limited available space at the downtown office and continued growth of the Company, management recognized the need for an Operations Center that would provide ample space for expansion. The Bank owned an office building, initially acquired through foreclosure, at 4633 Brambleton Avenue in Roanoke that could be converted to a secure Operations Center. The two story 12,000 square foot building was built in 2007. At a board meeting held on December 18, 2014, the Board of Directors approved the Bank’s use of the property, and it was reclassed from other real estate owned to property and equipment.

ITEM 3. LEGAL PROCEEDINGS.

The Bank is not involved in any material pending legal proceedings at this time, other than routine litigation incidental to its business, and the Company does not expect that such litigation will be material in respect to the amount in controversy.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information and Holders

Shares of the Company’s common stock, $5.00 par value per share, are not listed on any stock exchange, however are quoted on the Over the Counter Bulletin Board under the stock symbol “HTMA”. Based on available information, the Company believes that from January 1, 2015 to December 31, 2015, the selling price of shares of its common stock ranged from $6.90 to $9.00, and that approximately 227 thousand shares were traded. There may, however, have been other transactions at other prices not known to the Company.

	2015				2014
Quarter Ended	High Close		Low Close		High Close		Low Close
March 31	$	7.90	$	7.20	$	6.50	$	6.25
June 30	$	7.79	$	7.00	$	6.40	$	6.05
September 30	$	7.60	$	7.10	$	6.65	$	6.16
December 31	$	9.00	$	7.50	$	7.20	$	6.22

As of March 30, 2016, there were 3,373,259 shares of the Company’s common stock outstanding, which shares were held by 1,647 shareholders of record. No cash dividends have been paid on the common stock to date.

Dividends

The Company is subject to certain restrictions imposed by the Federal Reserve Board and capital requirements of federal and Virginia banking statutes and regulations. The Company has never paid a cash dividend on its common stock. The retained deficit has decreased over the last five years, and at December 31, 2015, the Company had retained earnings of $443 thousand. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.

ITEM 6. SELECTED FINANCIAL DATA.

Not Required.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

•

the ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;

•

reliance on the Company’s management team, including its ability to attract and retain key personnel;

•

interest rate fluctuations;

•

maintaining capital levels adequate to support the Company’s growth;

•

risk inherent in making loans such as repayment risks and fluctuating collateral values;

•

the ability to attract low cost core deposits to fund asset growth;

•

changes in laws and regulations applicable to us;

•

changes in general economic and business conditions;

•

competition within and from outside the banking industry;

•

problems with our technology;

•

changing trends in customer profiles and behavior; and

•

new products and services in the banking industry.

Although the Company’s management believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of management’s knowledge of the Company’s business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Critical Accounting Policies

The financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements and management’s discussion and analysis are, to a large degree, dependent upon the Company’s accounting policies. The selection and application of these accounting policies involves judgments, estimates, and uncertainties that are susceptible to change.

Presented below is discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.

Management monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. Management maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

The bank maintains an internal risk grading system by which it grades loans based on guidelines for assessing the risk of each loan, and monitoring trends in portfolio quality. Those loans deemed to have a higher-than-average risk of loss are rated pass watch, special mention, substandard, doubtful, or loss, depending upon the severity of risk. Credits with these ratings are made part of the bank’s internal watch list and are closely monitored for changes in condition.

Credits rated special mention, substandard, or doubtful, are individually analyzed quarterly by Credit Administration by preparing a detailed Criticized Asset Reporting and Action Plan. An Accounting Standards Codification (ASC) 310 Reserve for Individually Evaluated Credit analysis is performed on loans with relationships in excess of $100,000 identified as impaired using the Fair Value of Collateral Method to determine if the value of the liquidated collateral will satisfy the outstanding loan balance. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.

For loans without individual measures of impairment, we make estimates of losses for groups of loans based primarily on historical losses grouped by similar characteristics, including the type of loan, the assigned loan classification and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. Management recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

General

Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the financial condition and results of operations of the Company and the Bank as of and for the years ending December 31, 2015 and 2014. This discussion should be read in connection with the Company’s Consolidated Financial Statements and the accompanying Notes thereto included in this Form 10-K.

The Company initiated its banking operations through the Bank, on November 14, 2005 with the opening of its main office at 202 S. Jefferson Street, Roanoke, Virginia. The Bank has experienced consistent growth over the last ten years.

The Business

HomeTown Bank provides a full complement of consumer and commercial banking services to its primary service area which includes the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Bedford, Franklin and Montgomery, Virginia. We place an emphasis on personal service and offer a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, residential and commercial mortgages, home equity loans, consumer installment loans, commercial loans, lines and letters of credit.

The Bank currently operates six full service branches, seven 24-hour ATM’s, and one mortgage office. In addition to its main office, the Bank has branch offices in Franklin County, Virginia at Westlake; in Roanoke County at the intersection of Colonial Avenue and Virginia Route 419; in Roanoke City on Franklin Road in South Roanoke, in Salem on West Main Street. The Bank operated under the name NewRiver Bank, a branch of HomeTown Bank in the New River Valley market, on Market Street in Christiansburg until the end of the first quarter of 2016. In a step to provide better brand recognition, the Bank began using the name HomeTown Bank throughout all its branch locations.

The Company operates in a highly competitive market for commercial banking and financial services as the Roanoke Valley is a banking and financial services hub for much of southwest Virginia.

Discussion of Results of Operations

Overview of Results of Operations

Net income attributable to HomeTown Bankshares Corporation for 2015 totaled $3.6 million and was $139 thousand or 4.1% higher than the prior year. The basic earnings per common share for 2015 was $0.82, an increase of $0.04 over 2014; while the fully diluted earnings per common share was $0.64 for 2015 compared to $0.62 for the previous year. Improved net interest income and noninterest income contributed to higher earnings in 2015 over 2014. The benefit of loan growth was partially offset by the margin compression that the Company and the banking industry continue to experience. The resurgence in mortgage lending and a non-recurring gain from the sale of a building were the primary contributors to higher noninterest income. Partially offsetting these favorable variances were the higher costs that accompanied the expansion in operations over the last few years, and increased expense related to foreclosed properties.

Summary of Financial Condition

At the end of 2015, assets totaled $479 million, compared to $428 million at December 31, 2014, an increase in total assets of $51.2 million or 12.0% year over year. The expansion of the loan portfolio accounted for 70% of the increase, and was funded by deposit growth. Total net loans grew $35.7 million or 10.9% from $328 million at December 31, 2014 to $364 million a year later. The expansion of loans reflected continued modest improvement in the economy during 2015. During this time total deposits increased a corresponding $37.0 million or 10.2% to $400 million at year end 2015.

Cash and due from banks totaled $28.7 million on December 31, 2015, $15.0 million or over 100% higher than the balance of $13.8 million a year ago. Net cash proceeds from the issuance of subordinated notes in December 2015 contributed $7.3 million to the increase. The proceeds from the debt issuance will fund future organic growth and be used for other general business purposes.

Securities available for sale were $52.5 million and $54.6 million at the end of 2015 and 2014, respectively. The yields on securities available for purchase continued to be relatively low through 2015, and the Company continued to channel cash flow from lower rate investments in bonds to higher rate loans.

Bank owned life insurance increased $2.7 million during the year ended December 31, 2015 to $6.3 million at the end of the year. During 2015, the Company expanded the Supplemental Retirement Plan (SERP) to include all executive managers. The benefit was funded by purchasing $2.5 million of additional bank owned life insurance policies for the individuals involved. The liability for the SERP is included in other liabilities. The SERP is discussed in greater detail in Note 14 Salary Continuation Plan.

Total liabilities at December 31, 2015 were $433 million, compared to $385 million at the end of 2014, an increase of $48.0 million or 12.5%. Total deposits, the primary component of total liabilities, were $400 million at December 31, 2015, and accounted for 77.0% of the increase in total liabilities. Federal Home Loan Bank (FHLB) borrowings increased $2.0 million from $20.0 million at December 31, 2014 to $22.0 million at December 31, 2015. FHLB borrowings at the end of 2015 were down from the average for the year of $25.2 million and reflected increased liquidity at year end. The net proceeds from the subordinated notes provided additional liquidity at the end of the year 2015. See Notes 8 and 9 for the terms of the FHLB Borrowings and Subordinated Notes.

Noninterest bearing deposits were $77.3 million at the end of 2015, a rise of $26.0 million from the same day a year earlier. Commercial and consumer deposits contributed to the increase with commercial depositors accounting for just over half of the total increase. Because of the low interest rate environment over the past few years, demand deposits at commercial banks have grown at an unprecedented rate; this trend is expected to reverse itself as shorter term rates rise. Interest bearing deposits totaled $322 million and $311 million at December 31, 2015 and December 31, 2014, respectively.

Stockholders’ equity was $46.4 million at December 31, 2015, $3.2 million or 7.3% above the $43.2 million at the end of the previous year. Net income available to common stockholders of $2.7 million for the year 2015 resulted in a retained earnings of $443 thousand at December 31, 2015 compared to a retained deficit of $2.3 million at the end of 2014. Management believes the Company has sufficient capital to fund its operations while the Company strives to generate profits on a consistent basis, but there can be no assurance that this will be the case.

At December 31, 2015, 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. Following is a breakdown of non-performing assets:

(Dollars in thousands)	2015		2014		2013		2012		2011
Real Estate:
Construction and land development	$	11	$	—	$	—	$	1,756	$	632
Residential 1-4 families		—		475		707		582		1,357
Commercial real estate		368		758		—		236		—
Commercial loans		47		—		193		—		43
Equity lines		—		—		59		115		—
Loans to individuals		—		21		30		—		—
Total nonperforming loans		426		1,254		989		2,689		2,032
Other real estate owned		5,237		6,986		8,143		8,938		9,562
Total nonperforming assets, excluding performing restructured loans		5,663		8,240		9,132		11,627		11,594
Performing restructured loans		6,398		6,052		6,278		6,543		8,368
Total nonperforming assets, including restructured loans	$	12,061	$	14,292	$	15,410	$	18,170	$	19,962

The five year trend of non-performing assets reflects continued improvement in the economy from the economic crisis which began in 2008. Nonperforming assets, including restructured loans were 2.52% of total assets at the end of 2015, compared to 3.34% at the end of 2014 and 3.83% at the end of 2013.

Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and unsecured consumer loans are designated as non-accrual when payment is delinquent 90 days or at the point which the Company considers collection doubtful, if earlier. Consumer mortgage loans and most other types of consumer loans past due 90 days or more may remain on accrual status if management determines that concern over our ability to collect principal and interest is not significant. When loans are placed in non-accrual status, previously accrued and unpaid interest is reversed against interest income in the current period and interest is subsequently recognized only to the extent cash is received and if principal repayment is probable. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

Nonperforming loans declined $828 thousand from $1.3 million at the end of 2014 to $426 thousand at December 31, 2015. Three of the loans classified as nonaccrual and totaling $852 thousand at year end 2014 were returned to an accrual status during 2015 based on their performance. Two loans totaling $46 thousand, related to one borrower, were placed on nonaccrual status during the year ended December 31, 2015. The remaining two loans, that continued to be classified as nonaccrual at the end of 2015, were making payments and were not past due at the end of the year. However they are remaining on nonaccrual until performance warrants return to accrual status.

Most non-accrual loans are classified as impaired. At December 31, 2015, 89.23% of nonaccrual loans or $380 thousand were classified as impaired, and included all non-accrual loans with a balance greater than the $100 thousand threshold for consideration as impaired. Impaired loans are evaluated periodically on an individual basis, and if appropriate, losses are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. Specific reserves of $17 thousand were recorded for impaired loans at December 31, 2015.

See also Note 5 of the Notes to Consolidated Financial Statements for information on changes in other real estate owned and for the major classifications of other real estate owned for 2015 compared to 2014. As disclosed in Note 23 Subsequent Events, on February 26, 2016, the Bank added $473 thousand to other real estate owned. At December 31, 2015, the related loan was included in “Current” in Note 3 and “Pass” in Note 4. The borrower was an independent church and the membership voted to disband in the first quarter of 2016, prompting the Bank to negotiate a deed-in-lieu of foreclosure. Additional collateral in the form of an assigned notes receivable was received as part of the negotiation

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. The relationship between the provision and the allowance is discussed in more depth under Provision and Allowance for Loan Losses.

Net Interest Income and Net Interest Margin

The primary source of the Company’s revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, interest bearing bank accounts and certificates of deposit, and federal funds sold. Interest bearing liabilities include deposits and borrowings. The amount of net interest income is primarily dependent upon the volume and mix of these earning assets and interest bearing liabilities. Interest rate changes can also impact the amount of net interest income. Management develops pricing and marketing strategies to maximize net interest income while maintaining related assets and liabilities accounts within guideline policies as established by the Company’s Board of Directors.

The net interest margin represents net interest income divided by average earning assets. It reflects the average effective rate that the Company earned on its earning assets. The net interest margin is affected by changes in both interest rates and average volumes of interest earning assets and interest bearing liabilities.

For the year 2015, net interest income totaled $15.4 million; an increase of $710 thousand or 4.8% over the $14.7 million earned in the previous year. The expansion of the loan portfolio was the driving force underlying the increase. For the year ended December 31, 2015, average gross loans totaled $351 million and were $35.2 million or 11.2% higher than the average of $316 million for 2014. The expansion of average gross loans for 2015 versus 2014 was funded primarily by increases in core deposits. A strategic reduction of the investment portfolio and an increase in FHLB borrowings funded the remainder of the growth in loans in 2015. Total average deposits increased $31.8 million in 2015 compared to 2014. Average FHLB borrowings were $25.2 million for 2015, up $3.3 million from the average for the prior year.

The increased volume of loans provided $1.5 million additional interest income in 2015, which was partially offset by $412 thousand in lower yields on loans. Loan yields dropped 16 basis points to 4.66% for the year 2015. Increased liquidity in the markets has fostered competition among commercial banks and other financial services industries to satisfy growing loan demand. Competition has driven rates on new loans and renewals downward. In the March 2, 2016 Beige Book, The Fifth District of the Federal Reserve, which includes Virginia, reported that consumer and commercial loan demand had continued to rise. The Federal Reserve further reported that commercial construction had grown moderately in the Roanoke Metropolitan Statistical Area (MSA). Although the Company has forecast that loans will continue to rise in 2016, there are no guarantees. Actual results may be materially different from past or anticipated results because of many factors, some of which may include changes in economic conditions, the interest rate environment, legislative and regulatory requirements, and competition.

During 2015, the steepness of the treasury yield curve increased and then declined. When the Fed finally raised interest rates in December, the shorter term and longer term ends of the curve were lifted above the same points in the prior year. Global economic pressures flattened the curve somewhat during early 2016. The relatively flat yield curve in 2015 resulted in the Company continuing to channel funds from sales, payments and maturities of lower rate investments in bonds to higher rate loans, resulting in a more favorable mix of earning assets. Average investments were down $6.2 million for 2015 compared to the prior year.

The net interest spread and net interest margin were compressed 11 basis points during 2015 compared to the prior year. The yield on earning assets declined 9 basis points, while the cost of interest bearing liabilities rose 2 basis points. While the loan yield declined 16 basis points in 2015, the impact on the yield on total earning assets was mitigated by the more favorable mix of earning assets in 2015. The 2 basis point increase in the cost of interest bearing liabilities to 0.67% for 2015 over 2014 resulted from CD promotions in December 2014 and June 2015 to raise funding to meet loan demand. There were a few downward adjustments of other interest bearing deposit rates in 2015. Management does not expect any additional downward adjustments in 2015, and, in fact, rates paid on deposits products may rise.

The Federal Reserve develops monetary policy to attain its objectives of maximum employment and price stability. The Federal Open Market Committee (FOMC) at its December, 2015 meeting raised the target range for the federal funds rate 25 basis points to ¼ to ½ percent. This was the first change since 2008 and the first increase since 2006. The increase was widely anticipated in financial markets. At the January 26-27, 2016 meeting the FOMC decided to maintain the target range of ¼ to ½ percent. With regards to timing and size of future adjustments, the FOMC stated, “In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” The National Association for Business Economics Released a survey on February 7, 2016, in which 80 percent of the economists asked said they expected the Federal Reserve to raise rates at least once in 2016.

The Company expects the Federal Reserve to raise rates in a gradual and measured manner. Management expects the combination of lower loan yields and possibly higher deposit costs in the future to further compress the net interest margin in 2016. The weighted average maturity of the fixed rate portion of the loan portfolio has remained relatively unchanged in 2015. Maintaining a relatively short term of forty-four months as of December 31, 2015 presents pricing opportunities in the future.

The following table illustrates average balances of total interest-earning assets and total interest bearing liabilities for 2015, 2014 and 2013, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.

Average Balances, Interest Income and Expense, Yields and Rates

	2015								2014								2013
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	1,221		$	2		0.15	%	$	771		$	1		0.17	%	$	745		$	2		0.24	%
Deposits in banks		5,407			39		0.71			6,104			38		0.63	%		7,337			42		0.57
Securities, taxable		35,855			741		2.13			42,866			1,000		2.34	%		52,948			1,277		2.41
Securities, nontaxable(1)		14,673			405		4.12			13,976			400		4.33	%		7,581			206		4.13
Restricted equity securities		2,710			140		5.16			2,560			129		5.02	%		2,437			100		4.10
Loans held for sale		510			20		4.01			211			9		4.28			–			–		–
Loans		350,805			16,354		4.66			315,608			15,221		4.82	%		283,791			14,403		5.08
Total earnings assets		411,181			17,701		4.36	%		382,096			16,798		4.45	%		354,839			16,030		4.55	%
Less: Allowance for loan losses		(3,319	)							(3,658	)							(3,787	)
Total non-earning assets		45,640								35,722								34,071
Total Assets	$	453,502							$	414,160							$	385,123

Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	78,947		$	118		0.15	%	$	75,585		$	141		0.19	%	$	67,642		$	169		0.25	%
Money market savings		63,642			161		0.25			63,356			200		0.32			61,611			238		0.39
Regular savings		36,037			142		0.40			29,482			133		0.45			23,753			132		0.56
Time Deposits		139,282			1,477		1.06			133,413			1,272		0.95			130,546			1,306		1.00
FHLB borrowings		25,208			371		1.45			21,918			358		1.61			19,530			372		1.88
Subordinated notes		281			19		6.89			—			—		—			—			—		—
Other borrowings		1,324			23		1.69			1,157			14		1.15			852			5		0.60
Total interest bearing liabilities		344,721			2,311		0.67			324,911			2,118		0.65			303,934			2,222		0.73
Non-interest bearing liabilities:
Demand deposits		61,975								46,200								39,047
Other liabilities		1,749								1,394								1,257
Total liabilities		408,445			2,311					372,505			2,118					344,238			2,222
Total HomeTown Bankshares Corporation stockholders’ equity		44,785			—					41,655			—					40,885			—
Noncontrolling interest in consolidated subsidiary		272								—			—					—			—
Total Stockholders’ equity		45,057			—					41,655			—					40,885			—
Total Liabilities and Stockholders’ Equity	$	453,502			2,311				$	414,160			2,118				$	385,123			2,222
Net interest income				$	15,390							$	14,680							$	13,808
Interest rate spread							3.69								3.80								3.82
Interest expense to average earning assets							0.57								0.55								0.63
Net interest margin							3.79	%							3.90	%							3.92	%

(1) Yields on tax-exempt municipal bonds are calculated as tax equivalent.

Rate and Volume Analysis

	2015 Compared to 2014									2014 Compared to 2013
	Increase			Change Due To:						Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	1		$	—		$	1		$	(1	)	$	(1	)	$	—
Deposits in banks		1			5			(4	)		(4	)		4			(8	)
Securities, taxable		(259	)		(97	)		(162	)		(277	)		(1	)		(276	)
Securities, nontaxable		5			(22	)		27			194			11			183
Restricted equity securities		11			4			7			29			24			5
Loans held for sale		11			(2	)		13			9			—			9
Loans		1,133			(412	)		1,545			818			(665	)		1,483
Total interest income		903			(524	)		1,427			768			(628	)		1,396

Interest expense:
Interest bearing liabilities:
Checking		(23	)		(29	)		6			(28	)		(46	)		18
Money market savings		(39	)		(40	)		1			(38	)		(45	)		7
Regular savings		9			(16	)		25			1			(28	)		29
Time Deposits		205			95			110			(34	)		(74	)		40
FHLB borrowings		13			(38	)		51			(14	)		(57	)		43
Subordinated notes		19			—			19			—			—			—
Other borrowings		9			(3	)		12			9			—			9
Total interest expense		193			(31	)		224			(104	)		(250	)		146

Net interest income	$	710		$	(493	)	$	1,203		$	872		$	(378	)	$	1,250

Noninterest Income

Noninterest income includes service charges on deposit accounts, ATM and interchange income, brokerage fees on non-portfolio mortgage loans, and net gains on securities sales. Noninterest income increased $1.1 million or 57.5% for the year 2015 compared to the prior year. Included in 2015’s earnings was a $348 thousand net gain from the sale of a building that was adjacent to a branch that the Company had previously leased to an unrelated third party. Without the non-recurring gain from the sale of the building, noninterest income was 39.1% higher in 2015 than 2014. Increases in service charges on deposit accounts by $71 thousand and ATM and interchange income by $132 thousand were the result of the expansion of the core deposit base. Mortgage banking income for 2015 was $472 thousand greater than the prior year. The increase reflected the fact that the number of residential units sold in the Roanoke Valley rose by 604 units to 4,688 for 2015 according to the Roanoke Valley Association of Realtors. During this time frame the average home price increased 2.1%. For 2016 through 2018, the Mortgage Bankers Association has projected steady growth in the purchase market with refinances expected to decrease as rates rise. The Company bought life insurance on additional key executives in the first quarter of 2015 resulting in a greater increase in the cash surrender value for the year. A factor contributing to higher Other Income in 2015 was an increase of $43.1 thousand in revenue related to merchant processing.

Non-Interest Income

	Period Ended December 31,
(Dollars in thousands)	2015		2014
Service charges on deposit accounts	$	523	$	452
ATM and interchange income		575		443
Mortgage banking income		703		231
Net gains on sales of investment securities		52		128
Gain on sale of building		348		−
Rental income		123		118
Increase in cash surrender value of bank owned life insurance		163		104
Other Income		484		410
Total non-interest income	$	2,971	$	1,886

Noninterest Expense

Non-interest expense includes, among other things, salaries and benefits, occupancy costs, data processing advertising and marketing, and professional fees. Total noninterest expense increased $1.6 million or 13.8%, to $13.2 million for 2015. The Company’s management and staff monitor and control operating expenses to provide adequate operational support and enable growth opportunities.

Salaries and employee benefits for 2015 were $6.5 million compared to $5.8 million for the prior year. The $727 thousand or 12.5% increase was due to several factors. The new Salem branch opened for business on July 28, 2014. Staffing of the new Salem branch accounted for $98 thousand more in salaries in 2015 versus 2014. The expense for the Supplemental Retirement Plan for certain key officers was $82 thousand more in 2015 than the previous year, as a result of expanding the benefit to include all executive managers. The improved financial performance of mortgage banking resulted in a $98 thousand increase in commissions and other incentive pay. Salaries and employee benefits expense includes non-cash expense for stock based compensation of $137 thousand and $58 thousand in 2015 and 2014, respectively. See Note 13 to the consolidated financial statements for additional information. 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 $1.8 million for the year ended December 31, 2015, an increase of $222 thousand or 14.5% over the prior year. At the end of 2014, an office building that had been previously acquired through foreclosure was repurposed as an Operations Center for the Bank. The two story 12,000 square foot building provided ample space for current and future expansion. Some of the costs at the Operations Center were for major repairs that are not considered a normal recurring monthly expense. Occupancy cost was $128 thousand for the twelve months the building was utilized as an Operations Center in 2015 versus a few days in 2014. The Salem branch was only open for business part of the year in 2014 as opposed to the full year in 2015, resulting in $64 thousand more occupancy expense.

Discretionary spending on advertising and marketing was $93 thousand or 15.6% higher in 2015 than 2014. In November 2014, Valley Bank announced its sale to the Bank of North Carolina. The merger was consummated on July 1, 2015. With the completion of the sale of Valley Bank, HomeTown Bank is now the largest community bank headquartered in the Roanoke Valley. The Company aggressively marketed to its customer base to increase market share.

Professional fees totaled $386 thousand in 2015, and were $195 thousand less than the previous year. The previous year included $126 thousand in legal fees related to the unfair competition claim brought against HomeTrust Bank, which was settled favorably in August 2014.

Data processing expense totaled $856 thousand and $720 thousand for the years ended December 31, 2015 and 2014, respectively. The increase reflected additional processing costs incurred from the expansion of the core deposit customer base.

Gains, losses on sales and writedowns of other real estate was $356 thousand more in 2015 than 2014. In December 2015, a structural deficiency was identified in a building acquired through foreclosure. Working with contractors and engineers to assess the problem and evaluate remediation proposals, the Company determined it was appropriate to write down the carrying value of the property by $261 thousand.

Other expenses were $1.5 million in 2015 compared to $1.2 million in 2014. Other expense includes compliance costs, office supplies and printing costs, and a sundry of other fees and expenses.

Non-Interest Expense

	Period Ended December 31,
(Dollars in thousands)	2015		2014
Salaries and employee benefits	$	6,529	$	5,802
Occupancy and equipment expense		1,757		1,535
Advertising and marketing expense		691		598
Professional fees		386		581
Data processing expense		856		720
Bank franchise taxes		262		262
FDIC insurance expense		320		283
Gains, losses on sales and writedowns of other real estate		346		(10	)
Other real estate owned expense		151		224
Directors’ fees		222		223
Communications expense		149		115
Other expense		1,486		1,231
Total non-interest expense	$	13,155	$	11,564

Income Tax Expense

Income tax expense was $1.6 million the years ended December 31, 2015 and 2014. See Note 16 Income Taxes for a breakdown of current and deferred taxes and detail of the net deferred taxes at the end of both years. The Company had no operating loss carryforwards at December 31, 2015.

Loans

Our primary source of income is our lending activities. The following table presents the composition of the Company’s loan portfolio at the dates indicated:

Loan Portfolio

	December 31,
(Dollars In Thousands)	2015		2014		2013		2012		2011
Construction:
Residential	$	11,779	$	10,019	$	6,768	$	5,036	$	3,695
Land acquisition, development & commercial		27,440		23,686		20,904		20,198		23,911
Real Estate:
Residential		100,268		86,269		72,934		69,691		58,070
Commercial		140,952		135,070		126,100		109,302		102,312
Commercial, industrial & agricultural		53,012		44,807		42,155		42,382		36,297
Equity lines		26,376		24,330		20,374		20,504		19,018
Consumer		7,531		7,498		8,698		7,824		5,776
Total loans	$	367,358	$	331,679	$	297,933	$	274,937	$	249,079

As with most community banks, the loan portfolio is concentrated in commercial real estate loans, and comprised 38.4% and 40.7% of the total loan portfolio at December 31, 2015 and 2014, respectively. At year-end 2015, there were no industry concentrations with outstanding balances representing 10% or more of total loans.

Maturities of Loans at December 31, 2015 are as follows:

(Dollars in Thousands)	Fixed Rate		Adjustable Rate		Total
Construction loans Maturing:
Within one year	$	9,342	$	5,608	$	14,950
One to five years		10,899		7,846		18,745
After five years		1,306		4,218		5,524
Total	$	21,547	$	17,672	$	39,219

(Dollars in Thousands)	Fixed Rate		Adjustable Rate		Total
Commercial loans Maturing:
Within one year	$	3,579	$	7,869	$	11,448
One to five years		16,600		18,278		34,878
After five years		4,556		2,130		6,686
Total	$	24,735	$	28,277	$	53,012

Provision and Allowance for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level to cover known and inherent risk of loss in the loan portfolio. Based on the Company’s allowance for loan losses calculation and analysis at the end of 2015 and 2014, no provision was recorded in either year. The allowance consists of three components: specific, general, and unallocated. Their adequacy is evaluated separately. The Company's total reserves amounted to $3.3 million at December 31, 2015, $34 thousand less than the prior year end.

Specific reserves are determined on a loan by loan basis and relate to loans classified as impaired. Management classifies loans as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Included in potentially impaired loan category are current “watch list” credits rated special mention, substandard, or doubtful with a total combined credit relationship in excess of $100 thousand. Management individually reviews these potentially impaired loans based on generally accepted accounting standards related to receivables and makes a determination if the loan in fact is impaired. Management does not consider a loan impaired during a period of delay in payment if management expects the ultimate collection of all amounts due. If a loan is found to be impaired, an allowance is established when the collateral value, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. The factors considered in recognizing a loan as impaired are detailed in Note 1 Significant Accounting Policies. Impaired loans included the same borrowers at the end of 2015 and 2014. The total of the outstanding balances decreased $336 thousand from $8.2 million to $7.8 million at December 31, 2014 and 2015, respectively, due to payments. The specific reserves related to impaired loans declined $124 thousand during the same period of time to $17 thousand at year end 2015.

The Bank continued to make improvements in credit quality which allowed for the reduction of the overall allowance for loan losses. The coverage ratio of the allowance for loan losses to nonaccrual loans increased from 266% to 775% at December 31, 2014 and 2015, respectively. As presented in the Table of Non-performing Assets, nonaccrual loans declined $828 thousand from $1.3 million at the end of 2014 to $426 thousand at the end of 2015. Substandard loans totaled $2.1 million at December 31, 2015, compared to $2.3 on the same day in 2014. During the same period special mention loans decreased $627 thousand. Pass loans as a percent of total loans rose from 97.2% at December 31, 2014 to 97.7% at December 31, 2015. See Note 4 for detail of loans by credit quality indicators. During the twelve months ended December 31, 2015, $80 thousand of loans were charged off compared to $464 thousand for the twelve months ended December 31, 2014. This is significantly less than the three preceding years, as detailed in the table in this section. Recoveries of $46 thousand in 2015, and $75 thousand in 2014 partially replenished the allowance for loan losses.

The general component of the reserve covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The adequacy of general reserves is determined by dividing the remaining loan portfolio into 30 homogenous pools, each with its unique degree of inherent risk and applying a loss factor to each pool of loans. In determining the loss factor for each pool of homogenous loans the following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans and classified loans. From December 31, 2014 to December 31, 2015, the general component increased $90 thousand. For the same period of time, the loans collectively evaluated rose $36 million to $360 million at the end of 2015.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. It also reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. On a quarterly basis, management performs a detailed analysis of the allowance for loan losses to verify the adequacy and appropriateness of the allowance in meeting probable losses in the loan portfolio. See Note 4 for a more detailed breakdown of the allowance for loan losses.

Management considers economic information in determining the adequacy of the allowance for loan losses. The local markets are largely shielded from national events and trends, but do tend to realize lagging effects in subsequent quarters. At the January 26-27, 2016 meeting, the Federal Open Market Committee noted, that while labor market conditions had improved further, economic growth slowed towards the end of the year. The Company increased the factor related to economic conditions mid-year 2015 to reflect relatively flat population growth and the announcements by a few large companies that they were pulling out of the region. Norfolk Southern relocated approximately 500 marketing, accounting and information technology jobs to Norfolk and Atlanta. The Home Shopping Network announced that they would begin moving their fulfillment center operations to Tennessee in 2016 and eventually closing their facility in Roanoke County, impacting 350 jobs. Local economic data indicated slight improvements at the end of 2015. The Federal Reserve Bank of Richmond’s February 2016 Snapshot reported payroll employment expanded 2.28% for the Blacksburg MSA, while Roanoke’s MSA contracted 0.37% from the end of 2014 to the end of 2015. The unemployment rate improved in both MSA’s, and was 4.1% and 4.3% at December 31, 2015 for Roanoke and Blacksburg, respectively. The February Snapshot also reported an improved house price index for the Roanoke and Blacksburg MSA’s for November 2015 over the prior year. The house price index is a broad measure of the movement of single-family house prices. Blacksburg’s house price index for November 2015 improved 0.82% over the prior year while Roanoke’s improved 0.22% for the same period of time. While office leasing activity is up over 2014 and overall vacancy is down, the lower vacancy rate is temporary as a number of companies are vacating space, including Norfolk Southern, Cox Communications, and Allstate. The speed with which the office market can backfill the large blocks of space coming vacant will determine the future health of the market. Roanoke has proven to have strong office demand, and these vacancies present a great opportunity for a large user to relocate to the Roanoke area. Should the economy change, the Bank will look to adjust the factors in future quarter analysis.

The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated.

Allowance for Loan Losses

(Dollars In Thousands)	2015			2014			2013			2012			2011
Balance, beginning	$	3,332		$	3,721		$	3,790		$	3,979		$	5,228
Provision charged to operating expense		−			−			125			1,408			1,222
Recoveries of amounts charged off		46			75			381			19			3
Loans charged off		(80	)		(464	)		(575	)		(1,616	)		(2,474	)

Balance, ending	$	3,298		$	3,332		$	3,721		$	3,790		$	3,979

Ratio of net charge-offs to average loans		0.01	%		0.12	%		0.07	%		0.61	%		0.96	%

The following table presents the allocation of the Allowance for Loan Losses for the periods indicated. The Allowance for Loan Losses is allocated in the manner prescribed by ASU 2010-20 (Refer to Note 1 of Consolidated Financial Statements). Some unallocated reserves are desirable given the degree of estimation involved in the nature of the analysis of the adequacy of the allowance for loan losses.

December 31,
(Dollars in thousands)	2015					2014					2013					2012					2011
	Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans
Construction:
Residential	$	83		3.2	%	$	43		3.0	%	$	156		2.3	%	$	117		1.8	%	$	90		1.5	%
Land acquisition, development & commercial		187		7.4			453		7.2			872		7.0			811		7.4			953		9.6
Real Estate:
Residential		1,047		27.3			833		26.0			867		24.5			725		25.3			538		23.3
Commercial		1,001		38.4			1,012		40.7			1,008		42.3			1,054		39.8			1,114		41.1
Commercial, industrial & agricultural		531		14.4			319		13.5			327		14.2			459		15.4			828		14.6
Equity lines		277		7.2			423		7.3			385		6.8			386		7.5			313		7.6
Consumer		85		2.1			65		2.3			63		2.9			145		2.8			143		2.3
Unallocated		87		—			184		—			43		—			93		—			—		—
Total allowance for loan losses	$	3,298		100.0	%	$	3,332		100.0	%	$	3,721		100.0	%	$	3,790		100.0	%	$	3,979		100.0	%

Investment Portfolio

At December 31, 2015, 2014 and 2013 all of the Company’s securities were classified as available-for-sale. The composition of the investment portfolio for the years ending December 31, 2015 and 2014 appear in Note 2 of this report. The following table presents the composition of the investment portfolio as of December 31, 2013.

(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

The Company began recording income tax expense in 2012, based on an assessment of the Company’s profitable operations over the preceding quarters and projections of future taxable income. Able to now realize the associated tax benefit from investing in non-taxable municipal securities, the Company has restructured the portfolio to take advantage of this favorable income tax treatment.

Securities Available for Sale, Maturity Distribution and Average Yields

	December 31, 2015
(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
U.S. government agency securities:
Maturing within 1 year	$	−	$	−		−	%
Maturing after 1 year and within 5 years		1,311		1,324		1.90
Maturing after 5 years and within 10 years		7,162		7,177		2.10
Maturing after 10 years		17,912		17,935		2.37
Mortgage backed securities:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		−		−		−
Maturing after 5 years and within 10 years		1,412		1,416		2.19
Maturing after 10 years		7,391		7,357		1.57
Taxable municipal securities:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		250		250		1.67
Maturing after 5 years and within 10 years		628		651		4.60
Maturing after 10 years		1,098		1,125		4.58
Nontaxable municipal securities:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		248		251		2.20
Maturing after 5 years and within 10 years		1,161		1,180		3.20
Maturing after 10 years		13,371		13,878		4.27
Total Maturities	$	51,944	$	52,544		2.78	%

The weighted average yield for nontaxable municipal securities is reported on a tax equivalent basis.

Deposits

The Company’s primary source of funds is deposit accounts. The Company’s deposit base is comprised of demand deposits, savings and money market accounts, and time deposits. The Company’s deposits are provided primarily by individuals and businesses located in the Company’s market area. The Company is a member of the Promontory Financial Network and uses its CDARS and ICS programs to provide FDIC deposit insurance coverage for certificates of deposit or demand deposits in excess of $250 thousand, when requested by customers.

Total deposits increased by $37.0 million or 10.2% from $362.6 million at December 31, 2014 to $399.5 million at December 31, 2015. The Company’s ability to attract and retain deposits, and our cost of funds, has been, and will continue to be, significantly affected by market conditions.

The following table is a schedule of average balances and average rates paid for each deposit category for the periods presented:

Average Deposits and Rates Paid

	Average Deposits and Rates Paid December 31,
	2015					2014					2013
(Dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate
Non-interest bearing deposits	$	61,975				$	46,200				$	39,047
Interest bearing accounts:
Checking		78,947		0.15	%		75,585		0.19	%		67,642		0.25	%
Money market savings		63,642		0.25			63,356		0.32			61,611		0.39
Regular savings		36,037		0.40			29,482		0.45			23,753		0.56
Time Deposits		139,282		1.06			133,413		0.95			130,546		1.00
Total Interest Bearing		317,908		0.60	%		301,836		0.58	%		283,552		0.65	%
Total	$	379,883				$	348,036				$	322,599

The following table is a schedule of maturities for time deposits of $100,000 or more at the dates indicated:

Maturities of Certificates of Deposits with Balances of $100,000 or More

(Dollars in thousands)

Within

3 months

3 to 6

months

6 to 12

months

Over

1 year

Total

Percent

of Total

Deposits

At December 31, 2015

8,993

7,051

30,239

44,890

91,173

22.82

The following table is a schedule of the return on average assets and return on average equity for the dates indicated:

	For the years ended
	2015			2014			2013
Return on average assets		0.78	%		0.82	%		0.71	%
Return on average equity		7.94	%		8.20	%		6.68	%
Average equity to average assets		9.94	%		10.06	%		10.62	%
Dividend payout		—	%		—	%		—	%

Liquidity and Interest Rate Sensitivity

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, investments, securities and correspondent banking relationships, must be balanced with the Company’s obligations, commitments, and operational requirements, to maintain overall liquidity in conjunction with the maximization of interest rate spreads.

The Company’s asset based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $73.0 million at December 31, 2015, compared to $56.8 million at December 31, 2014. During the first half of 2015, liquidity decreased as available funds were used to fund the expansion of the loan portfolio. At the end of the third quarter, liquidity rose as the result of a higher level of commercial noninterest bearing deposits. Commercial deposits are by their nature highly volatile, and their decline in the fourth quarter was offset by the Company issuing $7.5 million in subordinated notes to provide a more stable source of liquidity. The Company expects liquidity to trend downward in the future as the funds from the debt issuance are invested in earning assets and used for general operating purposes. Surges and declines in commercial deposits will continue to impact liquidity in an unpredictable manner.

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. During the last quarter of 2014, and mid-2015, the Company offered competitive CD promotions which helped stem the out flow from maturing CD’s and attracted additional funding.

If deposits are not an attractive source for funding, either for reasons of maturity or pricing, alternative sources include 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 December 31, 2015, the Company had borrowed $22.0 million of the $32.0 million of lendable collateral value, leaving $10.0 million of unused credit immediately available. The Company also has an $8 million guidance line of credit to borrow against securities. The limit on this line is 15% of assets. In addition, the Company had $18.5 million of fed funds lines of credit available at the end of 2015. At December 31, 2015, there were no advances on the fed funds or guidance lines.

A financial institution can be exposed to several market risks that may impact its value or future earnings capacity. These risks include interest rate risk, foreign currency exchange risk, commodity price risk and equity market price risk. Our primary market risk is interest rate risk. Interest rate risk is inherent, because as a financial institution, we derive a significant amount of our operating revenue from customer deposits and possible borrowings at various terms and rates. These funds are then invested into earning assets (loans and investments) at various terms and rates.

Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specific time period as a result of scheduled maturities and repayment and contractual interest rate changes.

Interest rate sensitivity at December 31, 2015 is summarized in the table below

	Interest Rate Sensitivity
Rate Shock	Net Interest Income (NII)		NII Change from Level
+400	$	16,626		8.02	%
+300		16,260		5.65	%
+200		15,803		2.68	%
+100		15,479		0.57	%
Level		15,391
-100		15,459		0.44	%
-200		15,316		-0.49	%
-300		15,228		-1.06	%

The shifts in net interest income due to rate shocks are all within our policy limits. The floors on the equity lines and the business lines of credit keep the rates on these loans from increasing until rates increase high enough to exceed the floors. In the meantime, rates on deposits begin to increase as rates increase. This is why we are seeing a small increase in net interest income with rate shocks of 100. Change in net interest income increases with the 200 basis point shock, and further increases at the 300 and 400 basis point shocks.

The primary objective of our asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. The goal is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

Management strives to control the exposure to interest rate volatility and operates under policies and guidelines established by the Board of Directors, who set the level of acceptable risk, by understanding, reviewing and making decisions based on our risk position. In addition, pricing, promotion and product development activities are assessed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest risk objectives. We use a variety of analytical systems and balance sheet tools to manage interest rate risk.

Interest Rate Sensitivity

(Dollars in thousands)	0 - 3 Months			3 - 12 Months			1 - 5 Years			Over 5 Years			Total
Interest Earning Assets
Securities	$	8,085		$	5,186		$	21,583		$	20,225		$	55,079
Interest-bearing deposits in other banks		4,080			1,000			750			—			5,830
Loans, net		102,229			37,029			200,120			24,682			364,060
Loans held for sale		1,643			—			—			—			1,643
Federal funds sold		1,329			—			—			—			1,329
Total	$	117,366		$	43,215		$	222,453		$	44,907		$	427,941
Cumulative totals	$	117,366		$	160,581		$	383,034		$	427,941
Interest Bearing Liabilities
Interest checking	$	77,490		$	—		$	—		$	—		$	77,490
Savings		38,882			—			—			—			38,882
Money market		66,296			—			—			—			66,296
Time deposits		15,622			58,996			64,992			—			139,610
FHLB borrowings		—			14,000			8,000			—			22,000
Subordinated notes		—			—			7,194			—			7,194
Other borrowings		2,361			—			—			—			2,361
Total		200,651			72,996			80,186			—			353,833
Cumulative totals		200,651			273,647			353,833			353,833
Interest sensitivity gap	$	(83,285	)	$	(29,781	)	$	142,267		$	44,907		$	74,108
Cumulative interest sensitivity gap	$	(83,285	)	$	(113,066	)	$	29,201		$	74,108
Cumulative interest sensitivity gap to total interest earning assets		(19.46	)%		(26.42	)%		6.82	%		17.32	%

Capital Resources

To enable future growth of the Company, there must be an adequate level of capital. Management reviews the Company’s capital to ensure that the amount, composition and quality of the Company’s assets and liabilities satisfy regulatory requirements, meet or exceed industry standards, and support projected Company growth.

At December 31, 2015 and December 31, 2014, the Company had stockholders’ equity of $46.4 million and $43.2 million, respectively, an increase of $3.2 million or 6.5%. The convertible preferred shares pay dividends at the rate of 6% per year. Each share of Series C preferred stock is convertible into 160 shares of common stock. As of December 31, 2015, 400 shares of preferred stock have been converted to 64 thousand shares of common stock. The ability to pay dividends to common stockholders is limited by regulatory restrictions and the need to maintain sufficient capital in the Company and in our subsidiaries. The Company must consider different factors to ensure that any future dividends to common stockholders would be prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. The Company had $443 thousand in retained earnings at the end of 2015. No dividends were paid to common stockholders in 2015.

The Basel III capital framework represents the most comprehensive overhaul of the U.S. banking capital framework in over two decades. This new capital framework and related changes to the standardized calculations of risk-weighted assets are complex and create additional compliance burdens. Basel III rules became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule. The Basel III Capital Rules require significantly more capital and adopted more demanding regulatory capital risk weightings and calculations. As a result of the Basel III Capital Rules, many community banks could be forced to limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Company believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final Rules. However, increased capital requirements imposed by the Basel III Capital Rules may require the Company to limit its banking operations, retain net income to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations. See Note 18 for additional discussion of capital requirements.

The Company meets eligibility the criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The table presents the Bank’s capital amounts and ratios calculated using the Basel III rules in effect at December 31, 2015, and the Basel 1 rules in effect at December 31, 2014.

Risk Based Capital Analysis

Capital Analysis

HomeTown Bank	December 31,
(Dollars in thousands)	2015			2014
Common Equity Tier 1 Capital:
Common Stock	$	14,697		$	14,697
Surplus		31,930			25,793
Retained Earnings		4,929			1,873
Common Equity Tier 1 Capital		51,556			42,363
Tier 1 Capital:
Tier 1 Minority Interest		36			—
Tier 1 Capital		51,592			42,363
Total Capital:
Allowance for Loan Losses (allowable portion)		3,298			3,332
Total Capital	$	54,890		$	45,695

Capital Ratios:
Total Capital to Risk-Weighted Assets		13.80	%		13.00	%
Tier 1 Common Equity to Risk-Weighted Assets		12.96	%		N/A	%
Tier 1 Capital to Risk-Weighted Assets		12.97	%		12.05	%
Tier 1 Capital to Average Assets		10.83	%		10.00	%

The Bank’s total capital increased $9.2 million from December 31, 2014 to December 31, 2015, as the result of retaining $3.1 million of the year’s earnings and a capital infusion by the bank holding company of $6.0 million. The source of funds for the capital infusion was the proceeds from the issuance of the subordinated debt discussed in more depth in Note 9. The infusion will support future growth and be utilized for general business purposes.

Financial Instruments with off Balance Sheet Risk and Contractual Obligations and Other Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

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 and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Note 17 provides additional detail regarding commitments at the end of 2015 and 2014. There are no commitments to extend credit on impaired loans.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as a part of this report:

Financial Statements

Consolidated Balance Sheets, December 31, 2015 and 2014

Consolidated Statements of Income, Years Ended December 31, 2015 and 2014

Consolidated Statements of Comprehensive Income, Years Ended December 31, 2015 and 2014

Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2015 and 2014

Consolidated Statements of Cash Flows, Years Ended December 31, 2015 and 2014

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

HomeTown Bankshares Corporation

Consolidated Balance Sheets

December 31, 2015 and 2014

Dollars In Thousands, Except Share and Per Share Data	December 31, 2015		December 31, 2014
Assets
Cash and due from banks	$	28,745	$	13,795
Federal funds sold		1,329		649
Securities available for sale, at fair value		52,544		54,603
Restricted equity securities, at cost		2,535		2,476
Loans held for sale		1,643		242
Loans, net of allowance for loan losses of $3,298 in 2015 and $3,332 in 2014		364,060		328,347
Property and equipment, net		14,008		14,900
Other real estate owned, net of valuation allowance of $420 in 2015 and $422 in 2014		5,237		6,986
Bank owned life insurance		6,285		3,622
Accrued income		2,057		1,924
Other assets		942		665
Total assets	$	479,385	$	428,209

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	77,268	$	51,226
Interest-bearing		322,278		311,369
Total deposits		399,546		362,595
Federal Home Loan Bank borrowings		22,000		20,000
Subordinated notes		7,194		–
Other borrowings		2,361		422
Accrued interest payable		372		272
Other liabilities		1,521		1,695
Total liabilities		432,994		384,984

Commitments and contingencies		–		–

Stockholders’ equity:
Convertible preferred stock, no par value; Series C authorized 20,000 shares, issued and outstanding 13,600 at December 31, 2015 and 14,000 at December 31, 2014		12,893		13,293
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,362,536 (includes 37,848 restricted shares) at December 31, 2015 and 3,287,567 (includes 37,727 restricted shares) at December 31, 2014		16,801		16,438
Surplus		15,484		15,310
Retained earnings (deficit)		443		(2,271	)
Accumulated other comprehensive income		396		455
Total HomeTown Bankshares Corporation stockholders’ equity		46,017		43,225
Noncontrolling interest in consolidated subsidiary		374		–
Total stockholders’ equity		46,391		43,225
Total liabilities and stockholders’ equity	$	479,385	$	428,209

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the years ended December 31, 2015 and 2014

Dollars In Thousands, Except Share and Per Share Data	2015		2014
Interest and dividend income:
Loans and fees on loans	$	16,374	$	15,230
Taxable investment securities		741		1,000
Nontaxable investment securities		405		400
Dividends on restricted stock		140		129
Other interest income		41		39
Total interest and dividend income		17,701		16,798
Interest expense:
Deposits		1,898		1,746
Other borrowed funds		413		372
Total interest expense		2,311		2,118
Net interest income		15,390		14,680
Provision for loan losses		–		–
Net interest income after provision for loan losses		15,390		14,680

Noninterest income:
Service charges on deposit accounts		523		452
ATM and interchange income		575		443
Mortgage banking		703		231
Gains on sales of investment securities		52		128
Gain on sale of building		348		–
Other income		770		632
Total noninterest income		2,971		1,886

Noninterest expense:
Salaries and employee benefits		6,529		5,802
Occupancy and equipment expense		1,757		1,535
Data processing expense		856		720
Advertising and marketing expense		691		598
Professional fees		386		581
Bank franchise taxes		262		262
FDIC insurance expense		320		283
Losses (gains) on sales and writedowns of other real estate owned, net		346		(10	)
Other real estate owned expense		151		224
Directors’ fees		222		223
Other expense		1,635		1,346
Total noninterest expense		13,155		11,564
Net income before income taxes		5,206		5,002
Income tax expense		1,595		1,587
Net income		3,611		3,415
Less net income attributable to non-controlling interest		57		–
Net income attributable to HomeTown Bankshares Corporation		3,554		3,415
Effective dividends on preferred stock		840		840
Net income available to common stockholders	$	2,714	$	2,575
Basic earnings per common share	$	0.82	$	0.78
Diluted earnings per common share	$	0.64	$	0.62
Weighted average common shares outstanding		3,300,440		3,284,870
Diluted weighted average common shares outstanding		5,535,180		5,524,870

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2015 and 2014

Dollars In Thousands	2015			2014
Net income	$	3,611		$	3,415

Other comprehensive income:
Net unrealized holding (losses) gains on securities available for sale during the period		(38	)		1,725
Deferred income tax benefit (expense) on unrealized holding (losses) gains on securities available for sale		13			(587	)
Reclassification adjustment for gains on sales of investment securities included in net income		(52	)		(128	)
Tax expense related to realized gains on securities sold		18			44
Total other comprehensive (loss) income		(59	)		1,054
Comprehensive income		3,552			4,469
Less: comprehensive income attributable to the non-controlling interest		57			–
Comprehensive income attributable to HomeTown Bankshares Corporation	$	3,495		$	4,469

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended December 31, 2015 and 2014

Dollars in Thousands

	Preferred Stock Series C			Common Stock		Surplus			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest		Total
Balance, December 31, 2013	$	13,293		$	16,351	$	15,339		$	(4,846	)	$	(599	)	$	–	$	39,538
Net income										3,415								3,415
Other comprehensive income, net of tax													1,054					1,054
Restricted stock awarded					87		(87	)										–
Preferred stock dividend paid										(840	)							(840	)
Stock based compensation							58											58
Balance, December 31, 2014		13,293			16,438		15,310			(2,271	)		455			–		43,225
Consolidation of subsidiary shares from non-controlling interest																317		317
Net income										3,554						57		3,611
Other comprehensive loss, net of tax													(59	)				(59	)
Restricted stock awarded					43		(43	)										–
Preferred stock dividend paid										(840	)							(840	)
Conversion of preferred stock to common stock		(400	)		320		80
Stock based compensation							137											137
Balance, December 31, 2015	$	12,893		$	16,801	$	15,484		$	443		$	396		$	374	$	46,391

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the years ended December 31, 2015 and 2014

Dollars in Thousands	2015			2014
Cash flows from operating activities:
Net income	$	3,611		$	3,415
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		762			657
Amortization of premium on securities, net		575			577
Amortization of discount on subordinated notes		1			–
Gains on sales of loans held for sale		(527	)		(172	)
Losses (gains) on sales and writedowns of other real estate, net		346			(10	)
Gains on sales of investment securities		(52	)		(128	)
Gain on sale of building		(348	)		–
Net losses on fixed assets disposals		3			–
Increase in value of life insurance contracts		(163	)		(104	)
Stock compensation expense		137			58
Originations of loans held for sale		(24,690	)		(8,906	)
Proceeds from sales of loans held for sale		23,816			8,836
Changes in assets and liabilities:
Accrued income		(133	)		(47	)
Other assets		(277	)		(53	)
Deferred taxes, net		50			856
Accrued interest payable		100			(14	)
Other liabilities		(193	)		870
Net cash flows provided by operating activities		3,018			5,835
Cash flows used in investing activities:
Net (increase) decrease in federal funds sold		(680	)		89
Purchases of investment securities		(9,394	)		(9,428	)
Sales, maturities, and calls of available for sale securities		10,840			13,895
(Redemptions) purchase of restricted equity securities, net		(59	)		88
Net increase in loans		(35,713	)		(35,655	)
Proceeds from sales of other real estate		1,403			1,206
Purchases of bank owned life insurance		(2,500	)		–
Purchases of property and equipment		(370	)		(1,921	)
Proceeds from disposals of property and equipment		845			–
Net cash flows used in investing activities		(35,628	)		(31,726	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		26,042			4,994
Net increase in interest-bearing deposits		10,909			17,831
Net increase (decrease) in FHLB borrowings		2,000			(2,000	)
Issuance of subordinated notes, net		7,193			–
Net increase in other borrowings		1,939			164
Net increase in equity of non-controlling interest		317			–
Preferred stock dividend payment		(840	)		(840	)
Net cash flows provided by financing activities		47,560			20,149
Net increase (decrease) in cash and cash equivalents		14,950			(5,742	)
Cash and cash equivalents, beginning		13,795			19,537
Cash and cash equivalents, ending	$	28,745		$	13,795
Supplemental disclosure of cash flow information:
Cash payments for interest	$	2,211		$	2,132
Cash payments for income taxes	$	2,201		$	42
Supplemental disclosure of noncash investing activities:
Transfer from loans to other real estate owned	$	–		$	1,520
Transfer from other real estate to fixed assets	$	–		$	1,481
Change in unrealized gains and losses on available for sale securities	$	(90	)	$	1,597
Conversion of preferred stock to common stock	$	400		$	–

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

In 2014 the Bank formed a joint venture with another entity and now has a 49% ownership interest in HomeTown Residential Mortgage, LLC. The consolidated financial statements of HomeTown Bankshares Corporation include the accounts of its wholly-owned subsidiary HomeTown Bank and the accounts of its subsidiary, HomeTown Residential Mortgage LLC. HomeTown Bank owns a 49% interest in HomeTown Residential Mortgage LLC which originates and sells mortgages secured by personal residences. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Summary of Significant Accounting Policies

The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of HomeTown Bankshares Corporation and its wholly-owned subsidiary HomeTown Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the valuation of deferred tax assets. Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate (as applicable) is susceptible to changes in local market conditions.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and amounts due from correspondent banks. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated balance sheet caption “cash and due from banks.”

Securities

Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently, all of the Company’s investment securities are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Restricted Equity Securities

As members of the Federal Reserve Bank (FRB) and the FHLB, the Company is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past-due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.

●

Residential real estate construction loans carry risks that the home will not be finished according to schedule, will not be finished according to the budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

●

Land acquisition and development loans and commercial construction loans carry risks that the project will not be finished according to schedule, will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer, in the case of land acquisition and development loans, or the general contractor, in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.

●	Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

●

Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

●	Commercial, industrial and agricultural loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.

●	Equity lines of credit carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

●

Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.

TDRs (Troubled Debt Restructurings) occur when the Company agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past-due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on a record of making payments as scheduled for a period of six consecutive months.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Consumer loans are charged off when they become 120 days past due. Non-consumer loans are charged off when the loan becomes 180 days past due unless the loan is well secured and in the process of collection. Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:

●

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

●

Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

●

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Company’s credit extension. The payment history for the loan may have been inconsistent, and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Company. There is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Company will be unable to collect all amounts due.

●	Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification and are considered impaired.

●

Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

●	Loss rated loans are not considered collectible under normal circumstances, and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Loan Fees and Costs

Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Property and Equipment

Land is carried at cost. Buildings, equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Estimated useful lives range from ten to forty years for buildings and from three to ten years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.

Foreclosed Properties

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance are included in the income statement in the line “Gains, losses on sales and writedowns of other real estate owned, net.”

Bank Owned Life Insurance

The Company purchased life insurance policies during 2013 and 2015 on certain key executives. These policies are recorded at their cash surrender value. Increases in the cash surrender value of the life insurance contracts are included in noninterest income in the consolidated income statement caption “other income.”

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Advertising Expense

The Company expenses advertising and marketing costs as they are incurred.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statement of income. There are no unrecognized tax benefits as of December 31, 2015 and 2014.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. Potential common shares that may be issued by the Company relate to the convertible preferred stock outstanding and the outstanding stock options. The preferred stock is convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment. The potential dilutive effect of the outstanding stock options is determined using the treasury stock method.

Comprehensive Income

Comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense. These changes for the Company relate solely to unrealized gains and losses on securities available for sale.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Stock-Based Compensation Plan

The 2005 Stock Option Plan was approved by stockholders on April 20, 2006, which authorized 550,000 shares of common stock to be used in the granting of incentive options to employees and directors. This is the first stock incentive plan adopted by the Company. Under the plan, the option price cannot be less than the fair market value of the stock on the date granted. An option’s maximum term is ten years from the date of grant. Options granted under the plan may be subject to a vesting schedule.

The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this 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.

Recent Accounting Pronouncements

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 does not expect the adoption of ASU 2014-12 to have a material impact on its consolidated financial statements.

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

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

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

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

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

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

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

In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in 3 parts. Among other things, Part 1 amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent 5 percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and nonparticipant-directed investments. Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts 1 and 2 of this ASU are effective on a retrospective basis and Part 3 is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of ASU 2015-12 to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting).” On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the Codification. The adoption of ASU 2015-15 did not have a material impact on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” Among other things, the amendments in ASU 2016-07, eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company is currently assessing the impact that ASU 2016-07 will have on its consolidated financial statements.

Note 2. Investment Securities

Amortized cost and fair value of securities available for sale are as follows:

(Dollars In Thousands)	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	26,385	$	242	$	(191	)	$	26,436
Mortgage-backed securities		8,803		60		(90	)		8,773
Municipal securities		16,756		594		(15	)		17,335
	$	51,944	$	896	$	(296	)	$	52,544

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

The primary purpose of the investment portfolio is to generate income, diversify earning assets, and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio is made up primarily of fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business or entity behind the instrument. The primary cause of unrealized losses is the increase in market interest rates over the yields available at the time the securities were purchased.

At December 31, 2015, the Company does not consider any security in an unrealized loss position to be other-than-temporarily impaired.

U.S. Government and federal agency securities. The unrealized losses on twenty-five 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 basis of the investments. The Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.

Mortgage-backed securities. The unrealized losses on fourteen 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, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.

Municipal securities. The unrealized losses on five 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, and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.

The following tables demonstrate the unrealized loss position of securities available for sale at December 31, 2015 and 2014.

	December 31, 2015
	Less than 12 months					12 months or more					Total
(Dollars In Thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agency securities	$	8,878	$	(106	)	$	5,275	$	(85	)	$	14,153	$	(191	)
Mortgage-backed securities		3,447		(32	)		2,718		(58	)		6,165		(90	)
Municipal securities		805		(10	)		526		(5	)		1,331		(15	)
	$	13,130	$	(148	)	$	8,519	$	(148	)	$	21,649	$	(296	)

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

The amortized cost and estimated fair value of securities at December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to prepay obligations with or without call or prepayment penalties.

(Dollars In Thousands)	Amortized Cost		Fair Value
Less than one year	$	-	$	-
Over one through five years		1,809		1,825
Over five through ten years		10,363		10,424
Greater than 10 years		39,772		40,295
	$	51,944	$	52,544

Proceeds from the sales, maturities and calls of securities available for sale in 2015 and 2014 were $10.8 million and $13.9 million, respectively. The Company realized $52 thousand in net gains on sales of six available for sale securities in 2015, compared to $128 thousand from the sales of twelve securities in the prior year. The net gain in 2015 included gross gains of $67 thousand and gross losses of $15 thousand. The prior year included gross gains of $163 thousand and gross losses of $35 thousand. Total pledged securities had a fair market value of $7.4 million at December 31, 2015 and $8.8 million at December 31, 2014. Securities having a fair market value of $4.4 million were pledged to secure public deposits, while securities pledged to secure Federal Home Loan Bank borrowings totaled $1.4 million. $1.6 million in securities were pledged for other purposes at December 31, 2015.

Note 3. Loans Receivable

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

(Dollars In Thousands)	December 31,
	2015			2014
Construction:
Residential	$	11,779		$	10,019
Land acquisition, development & commercial		27,440			23,686
Real Estate:
Residential		100,268			86,269
Commercial		140,952			135,070
Commercial, industrial & agricultural		53,012			44,807
Equity lines		26,376			24,330
Consumer		7,531			7,498
Total loans	$	367,358		$	331,679
Less allowance for loan losses		(3,298	)		(3,332	)
Loans, net	$	364,060		$	328,347

The past-due and nonaccrual status of loans as of December 31, 2015 was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	−	$	−	$	−	$	−	$	11,779	$	11,779	$	−
Land acquisition, development & commercial		−		−		11		11		27,429		27,440		11
Real Estate:
Residential		297		−		50		347		99,921		100,268		−
Commercial		44		−		792		836		140,116		140,952		368
Commercial, industrial & agricultural		52		84		35		171		52,841		53,012		47
Equity lines		105		−		−		105		26,271		26,376		−
Consumer		−		−		−		−		7,531		7,531		−
Total	$	498	$	84	$	888	$	1,470	$	365,888	$	367,358	$	426

The past-due and nonaccrual status of loans as of December 31, 2014 was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	–	$	–	$	–	$	–	$	10,019	$	10,019	$	–
Land acquisition, development & commercial		–		–		–		–		23,686		23,686		–
Real Estate:
Residential		–		381		261		642		85,627		86,269		475
Commercial		–		85		–		85		134,985		135,070		758
Commercial, industrial & agricultural		96		–		–		96		44,711		44,807		–
Equity lines		105		–		–		105		24,225		24,330		–
Consumer		10		36		–		46		7,452		7,498		21
Total	$	211	$	502	$	261	$	974	$	330,705	$	331,679	$	1,254

There were two loans, totaling $842 thousand that were past due ninety days or more and still accruing interest at December 31, 2015. There were no loans past due ninety days or more and still accruing interest at December 31, 2014.

Impaired loans, which include TDRs of $6.7 million, and the related allowance at December 31, 2015, were as follows:

December 31, 2015

With no related allowance:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total Loans

Interest

Income

Recognized

Construction:

Residential

−

–

−

Land acquisition, development & commercial

−

–

−

Real Estate:

Residential

247

–

255

Commercial

7,451

7,627

–

7,623

291

Commercial, industrial & agricultural

–

−

Equity lines

−

–

−

Consumer

−

–

−

Total loans with no allowance

7,710

7,886

–

7,890

304

December 31, 2015

With an allowance recorded:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total Loans

Interest

Income

Recognized

Construction:

Residential

−

Land acquisition, development & commercial

−

Real Estate:

Residential

−

Commercial

127

135

−

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with an allowance

127

135

−

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

December 31, 2014

With no related allowance:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total Loans

Interest

Income

Recognized

Construction:

Residential

–

Land acquisition, development & commercial

–

Real Estate:

Residential

525

700

–

605

Commercial

7,507

–

8,563

289

Commercial, industrial & agricultural

–

Equity lines

–

Consumer

–

Total loans with no allowance

8,032

8,207

–

9,168

301

December 31, 2014

With an allowance recorded:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total Loans

Interest

Income

Recognized

Construction:

Residential

–

Land acquisition, development & commercial

–

Real Estate:

Residential

–

Commercial

141

153

–

Commercial, industrial & agricultural

–

Equity lines

–

Consumer

–

Total loans with an allowance

141

153

–

Troubled Debt Restructurings

At December 31, 2015, six loans totaling $6.7 million were classified as troubled debt restructurings (“TDRs”). Four of the six loans totaling $6.4 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2015. The other two loans totaling $252 thousand were on nonaccrual status at year end 2015. The loan restructured into two TDRs during the year ended December 31, 2015 was included in substandard nonaccrual loans and impaired loans at the end of 2014. All six TDRs were current with their restructured terms at December 31, 2015.

At December 31, 2014, four loans totaling $6.7 million were classified as troubled debt restructurings. Two of the four loans totaling $6.1 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2014. The other two loans totaling $639 thousand were on nonaccrual status. One of the loans evaluated separately for impairment at year end 2013 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 December 31, 2014. The outstanding balance of this loan was $22 thousand at December 31, 2014.

There was no valuation allowance related to total TDRs at December 31, 2015, or December 31, 2014.

The following table presents by class of loan, information related to the loan modified in a TDR during the year ended December 31, 2015:

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

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 TDRs For the year ended December 31, 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

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

Note 4. Allowance for Loan Losses

The following table presents, as of December 31, 2015, the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment) and the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

December 31, 2015	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	Beginning balance		Charge- offs			Recoveries		Provisions			Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment
Construction loans:
Residential	$	43	$	−		$	−	$	40		$	83	$	−	$	83	$	11,779	$	−	$	11,779
Land acquisition, development & commercial		453		−			−		(266	)		187		−		187		27,440		−		27,440
Real estate:
Residential		833		−			1		213			1,047		−		1,047		100,268		247		100,021
Commercial		1,012		−			−		(11	)		1,001		17		984		140,952		7,578		133,374
Commercial, industrial & agricultural		319		−			10		202			531		−		531		53,012		12		53,000
Equity lines		423		−			1		(147	)		277		−		277		26,376		−		26,376
Consumer		65		(80	)		34		66			85		−		85		7,531		−		7,531
Unallocated		184		−			−		(97	)		87		−		87		−		−		−
Total	$	3,332	$	(80	)	$	46	$	−		$	3,298	$	17	$	3,281	$	367,358	$	7,837	$	359,521

The following table presents, as of December 31, 2014, the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment) and the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

December 31, 2014	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	Beginning balance		Charge- offs			Recoveries		Provisions			Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment
Construction loans:
Residential	$	156	$	−		$	−	$	(113	)	$	43	$	−	$	43	$	10,019	$	−	$	10,019
Land acquisition, development & commercial		872		−			−		(419	)		453		−		453		23,686		−		23,686
Real estate:
Residential		867		(233	)		34		165			833		−		833		86,269		525		85,744
Commercial		1,008		−			−		4			1,012		141		871		135,070		7,648		127,422
Commercial, industrial & agricultural		327		(55	)		−		47			319		−		319		44,807		−		44,807
Equity lines		385		(136	)		37		137			423		−		423		24,330		−		24,330
Consumer		63		(40	)		4		38			65		−		65		7,498		−		7,498
Unallocated		43		−			−		141			184		−		184		−		−		−
Total	$	3,721	$	(464	)	$	75	$	−		$	3,332	$	141	$	3,191	$	331,679	$	8,173	$	323,506

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

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	11,779	$	−	$	−	$	−	$	11,779
Land acquisition, development & commercial		27,429		−		−		11		27,440
Real estate loans:
Residential		95,809		4,212		247		−		100,268
Commercial		138,034		1,155		1,395		368		140,952
Commercial, industrial, agricultural		51,801		1,164		−		47		53,012
Equity lines		26,376		−		−		−		26,376
Consumer		7,523		−		8		−		7,531
Total Loans	$	358,751	$	6,531	$	1,650	$	426	$	367,358

At December 31, 2015, the Company does not have any loans classified as Doubtful or Loss.

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

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

At December 31, 2014, the Company does not have any loans classified as Doubtful or Loss.

Note 5. Foreclosed Properties

Changes in foreclosed properties for 2015 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	7,408		$	(422	)	$	6,986
Additions		—			—			—
Writedowns		—			(346	)		(346	)
Sales		(1,751	)		348			(1,403	)
Balance at the end of the year	$	5,657		$	(420	)	$	5,237

Changes in foreclosed properties for 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		(1,618	)		422			(1,196	)
Transfer to fixed assets		(1,572	)		91			(1,481	)
Balance at the end of the year	$	7,408		$	(422	)	$	6,986

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

(Dollars In Thousands)	2015		2014
Residential lots	$	2,520	$	3,023
Residential development		423		423
Commercial lots		90		1,076
Commercial buildings		2,204		2,464
Total Other Real Estate Owned	$	5,237	$	6,986

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

(Dollars In Thousands)	2015		2014
Net (gain) loss on sales	$	—	$	(10	)
Provision for unrealized losses		346		—
Operating expenses		151		224
Total Other Real Estate Owned	$	497	$	214

Note 6. Property and Equipment

The major components of property and equipment at December 31, 2015 and 2014 were as follows:

(Dollars In Thousands)	2015		2014
Land	$	4,309	$	4,656
Buildings and improvements		8,611		8,720
Leasehold improvements		2,149		2,149
Furniture and equipment		3,113		3,074
Software		554		487
Construction in process		13		49
Property and equipment, total		18,749		19,135
Less accumulated depreciation and amortization		4,741		4,235
Property and equipment, net	$	14,008	$	14,900

Depreciation and amortization expense was $762 thousand and $657 thousand for the years ended December 31, 2015 and 2014, respectively.

Leases

The Company currently leases its main office under a non-cancelable lease agreement. The original lease expired on December 31, 2015, which provided an option to extend the lease for two additional five-year periods. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for one additional ten-year tem at expiration. The newly negotiated lease expires December 31, 2025. Terms of the new agreement provide for an annual rental increase, beginning January 1, 2017, based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. The Company currently leases a branch location under a non-cancelable lease agreement. Terms of the agreement provide for an annual rental increase based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. The lease expires on July 31, 2016 and provides an option to extend the lease for two additional five-year periods. The Company currently leases space to operate an automated teller machine under a non-cancelable lease agreement. The lease expires April 1, 2021 and provides an option to extend the lease for two additional five-year periods. Terms of the agreement provide for an annual rental increase of three percent over the rent for the immediately preceding lease year.

The current minimum annual lease payments under non-cancelable leases in effect at December 31, 2015 were as follows:

(Dollars In Thousands)	2014
2016	$	224
2017		168
2018		168
2019		169
2020		169
Thereafter		788
Total	$	1,686

Rent expense for the years ended December 31, 2015 and 2014 was $333 thousand and $322 thousand, respectively, and is included in occupancy and equipment expense on the Company’s consolidated statements of income.

Note 7. Deposits

The aggregate amount of time deposits in denominations of over two hundred and fifty thousand dollars at December 31, 2015 and 2014 were $10.0 million and $9.4 million, respectively.

At December 31, 2015, the scheduled maturities of time deposits are as follows:

(Dollars In Thousands)	2015
2016	$	74,626
2017		41,354
2018		14,024
2019		5,703
2020		3,903
Total	$	139,610

The Company obtains certain deposits through the efforts of third-party deposit brokers. At December 31, 2015 and 2014, brokered deposits totaled $34.2 million and $40.2 million, respectively, and were included in interest-bearing deposits on the consolidated balance sheets. There were no deposit relationships over 5% of total deposits at the end of 2015.

Note 8. Federal Home Loan Bank Borrowings

The Company has outstanding debt with the Federal Home Loan Bank of Atlanta in the amount of $22.0 million and $20.0 million as of December 31, 2015 and 2014, respectively. The Federal Home Loan Bank debt at December 31, 2015 is comprised of one convertible advance in the amount of $4 million, and three fixed rate advances totaling $18 million. Beginning on March 7, 2011, the Federal Home Loan Bank of Atlanta had the option to convert the convertible advance and on any quarterly interest payment date thereafter, with at least two business days’ notice. If called, the advance will be converted into a 3-month London Interbank Offered Rate (LIBOR) based adjustable rate credit.

At December 31, 2015 and 2014, borrowings from the Federal Home Loan Bank of Atlanta were as follows:

(Dollars In Thousands)
Advance Date	Maturity Date	Conversion Date	Current Rate			2015		2014
September 7, 2007	September 7, 2017	Quarterly		3.690	%	$	4,000	$	4,000
April 13, 2012	April 13, 2016			1.265	%		12,000		12,000
June 17, 2014	June 17, 2015			0.260	%		-		2,000
June 17, 2014	June 17, 2016			0.670	%		2,000		2,000
January 14, 2015	January 16, 2018			1.090	%		4,000		-
						$	22,000	$	20,000

The Company had collateral pledged on these borrowings at December 31, 2015, including real estate loans totaling $30.7 million, investment securities totaling $1.4 million, and Federal Home Loan Bank stock with a book value of $1.3 million.

Note 9. Subordinated Notes

On December 18, 2015, the Company completed the issuance of $7.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various institutional accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of December 30, 2025 and have an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes will have a floating interest rate based on LIBOR. Interest will be paid semi-annually, in arrears, on June 30 and December 30 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date.

(Dollars in Thousands)

As of December 31, 2015

Principal

Unamortized

Debt Issuance

Costs

Net

Subordinated notes

7,500

306

7,194

For the year ended December 31, 2015, the average effective interest rate was 6.89%.

The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company’s payments to general and secured creditors and depositors of its wholly owned subsidiary, HomeTown Bank.

The notes are redeemable, without penalty, on or after December 30, 2020 and, in certain limited circumstances, prior to that date.

The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is not “well capitalized” for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

Note 10. Other Borrowings

Other borrowings consist of the following at December 31, 2015 and 2014:

(Dollars In Thousands)	2015			2014
Securities sold under agreements to repurchase	$	759		$	185
Warehouse line of credit		1,602			237
	$	2,361		$	422

Weighted average interest rate at December 31		2.25	%		1.93	%

Securities sold under agreements to repurchase are secured transactions with customers and generally mature the day following the day sold. Short-term borrowings may also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions. The warehouse line of credit is a short-term revolving credit facility used to fund mortgage loans originations until the underlying loan is sold. The amount borrowed on the warehouse line of credit was $1.6 million at year end 2015 at a rate of LIBOR plus 2.25% with a LIBOR floor of 1.00%. The Company also has an $8 million guidance line of credit to borrow against securities. The limit on this line is 15% of assets. In addition, the Company had $18.5 million of fed funds lines of credit available at year-end 2015. At December 31, 2015and 2014, there were no advances on the fed funds or guidance lines.

Note 11. Fair Value Measurements

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

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

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

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

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

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

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

(Dollars In Thousands)

Carrying value at December 31, 2015

Description

Balance as of December 31,

2015

Quoted Prices

in Active Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

U.S. Government agency securities

26,436

–

26,436

–

Mortgaged-backed securities

8,773

–

8,773

–

Municipal securities

17,335

–

17,335

–

(Dollars In Thousands)

Carrying value at December 31, 2014

Description

Balance as of December 31,

2014

Quoted Prices

in Active Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

U.S. Government agency securities

26,965

–

26,965

–

Mortgaged-backed securities

9,739

–

9,739

–

Municipal securities

17,899

–

17,899

–

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

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

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

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period. The Company records loans held for sale as nonrecurring Level 2.

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

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

(Dollars In Thousands)			Carrying value at December 31, 2015
Description	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans, net of valuation allowance	$	110	$	–	$	–	$	110
Loans held for sale		1,643		–		1,643		–
Other real estate owned		5,237		–		1,300		3,937

(Dollars In Thousands)

Carrying value at December 31, 2014

Description

Balance as of

December 31, 2014

Quoted Prices

in Active Markets

for Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

Impaired loans, net of valuation allowance

–

Loans held for sale

242

–

242

–

Other real estate owned

6,986

–

3,255

3,731

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

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

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2015
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	110	Discounted appraised value	Selling cost	0%	-	0%	(0%)
				Discount for lack of marketability and age of appraisal	94.5%	-	94.5%	(94.5%)

Other real estate owned	$	1,735	Discounted appraised value	Selling cost	6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal	4%	-	9%	(8%)

	$	2,202	Internal evaluations	Internal evaluations	4%	-	39%	(21%)

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

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

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

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

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

Cash and due from banks: The carrying amounts reported in the consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of contractual maturities on such time deposits.

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

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

Loans 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 contractual maturities on such time deposits.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 30 days approximate their fair values.

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

Subordinated notes: The fair value of the subordinated notes is estimated using a discounted cash flow calculation that applies current incremental borrowing rates for similar types of borrowing arrangements.

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 December 31, 2015 and 2014, the fair value of loan commitments and standby letters of credit was deemed to be immaterial.

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2015:

(Dollars In Thousands)			Fair value at December 31, 2015
Description	Carrying value as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	28,745	$	26,995	$	1,767	$	–	$	28,762
Federal funds sold		1,329		1,329		–		–		1,329
Securities available for sale		52,544		–		52,544		–		52,544
Restricted equity securities		2,535		–		2,535		–		2,535
Loans held for sale		1,643		–		1,643		–		1,643
Loans, net		364,060		–		–		362,440		362,440
Bank owned life insurance		6,285		–		6,285		–		6,285
Accrued income		2,057		–		2,057		–		2,057
Financial liabilities
Total deposits		399,546		–		400,117		–		400,117
FHLB borrowings		22,000		–		22,191		–		22,191
Subordinated notes		7,194		–		7,354		–		7,354
Other borrowings		2,361		–		2,361		–		2,361
Accrued interest payable		372		–		372		–		372

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

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

Note 12. Earnings per Common Share

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

	For the Years Ended December 31,
	2015							2014
Dollars In Thousands, except share and per share data	Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount			Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		3,300,440	$	2,714	$	0.82			3,284,870	$	2,575	$	0.78
Series C Preferred Stock Dividends				840							840
Effect of dilutive securities:
Convertible preferred stock		2,234,740		−		(0.18	)		2,240,000		−		(0.16	)
Earnings per common share, diluted		5,535,180	$	3,554	$	0.64			5,524,870	$	3,415	$	0.62

At December 31, 2015 and 2014, stock options to purchase 546,460 and 549,560 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be antidilutive. Non-vested restricted shares were included in weighted average common shares outstanding for computing basic earnings per share, as the holder has voting rights and would share in a dividends during the vesting period.

Note 13. Stock Based Compensation

The Company recorded stock based compensation expense of $137 thousand and $58 thousand for the years ended December 31, 2015 and 2014, respectively.

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

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. No stock options were granted during 2015. On December 18, 2014, the Board of Directors granted 165 thousand shares which are vesting over a five-year period. Financial assumptions and variables used to determine the fair value of these stock options were: risk free interest rate of 2.01%, an expected term of 7.5 years, an expected stock price volatility of 26% and a dividend rate of 0%. Compensation expense is charged to income ratably over the vesting period and was $75 thousand and $2 thousand in 2015 and 2014, respectively. As of December 31, 2015, there was $301 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a period of four years. All previously issued options were fully vested at the end of 2012, resulting in no compensation expense being recorded in 2015 or 2014.

A summary of option activity under the 2005 stock option plan during the year ended December 31, 2015 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2014		549,560		$	8.61
Granted		–			–
Exercised		–			–
Forfeited		(3,100	)		7.76
Balance at December 31, 2015		546,460		$	8.62	$	–		3.06
Exercisable at December 31, 2015		437,793		$	9.04	$	–		1.59

(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 December 31, 2015.

In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five-year period and compensation expense is charged to income ratably over the vesting period and was $62 thousand in 2015 and $56 thousand in 2014. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The weighted-average grant date fair value of restricted stock granted in 2015 was $7.91 compared to $6.25 in 2014. The Company granted 10,969 and 17,268 shares of restricted stock under the plan in 2015 and 2014, respectively.

As of December 31, 2015, there was $184 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2020. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	2015					2014
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		37,727		$	5.56		27,846		$	5.05
Granted		10,969			7.91		17,268			6.25
Vested		(10,848	)		5.56		(7,387	)		5.23
Cancelled		–			–		–			–
Nonvested at end of year		37,848		$	6.24		37,727		$	5.56

Note 14. Salary Continuation Plan

The Company has a Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income. The Supplemental Executive Retirement Plan (the “SERP”) provides lifetime payments equal to 20% of a participant’s average annual base salary for the five years immediately prior to retirement. There is an incentive formula with an additional benefit of 20% of a participant’s average annual base salary for the five years immediately prior to retirement if performance targets set by the Board of Directors are met. The SERP contains provisions for disability and survivor benefits, a benefits vesting schedule based on age attained and automatic full vesting in the event of a change in control of the Company. During 2015, the SERP was expanded to include all executive managers. Deferred compensation accrued under the SERP totaled $315 thousand and $129 thousand at the end of 2015 and 2014, respectively. The funding mechanism for the plan is Bank Owned Life Insurance policies on the lives of the participants.

Note 15. Employee Benefit Plan

The Company adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. The Company makes non-discretionary matching contributions of 100% of the employee’s deferral up to 3% of compensation and matches 50% of the employee’s next 3% deferral. In addition, the Company may make additional contributions at the discretion of the Board of Directors. The Company’s matching contributions were $209 thousand for the years ended December 31, 2015 and 2014.

Note 16. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2012.

The current and deferred components of income tax expense for the periods ended December 31, 2015 and 2014 are as follows:

(Dollars In Thousands)	2015		2014
Current	$	1,514	$	731
Deferred		81		856
Income tax expense	$	1,595	$	1,587

Rate Reconciliation

Total income tax expense differed from the “expected” amount computed by applying the U.S. Federal income tax rate of 34 percent to income before income taxes as a result of the following.

(Dollars In Thousands)	2015			2014
Tax at statutory federal rate	$	1,770		$	1,701
Tax-exempt interest income		(196	)		(136	)
Cash surrender value of life insurance		(55	)		(35	)
Incentive stock options		47			19
Other		29			38
Income tax expense	$	1,595		$	1,587

Deferred Income Tax Analysis

The significant components of net deferred taxes at December 31, 2015 and 2014 are summarized as follows:

(Dollars In Thousands)	2015			2014
Deferred tax assets
Pre-opening expenses	$	78		$	94
Allowance for loan losses		518			513
Stock-based compensation		236			236
Deferred compensation		107			44
Other real estate expenses		143			175
Nonaccrual loan interest		11			14
Deferred tax asset		1,093			1,076

Deferred tax liabilities
Property and equipment		327			360
Unrealized gain on securities available for sale		204			235
Deferred loan fees		821			721
Deferred tax liability		1,352			1,316
Net deferred tax liability	$	(259	)	$	(240	)

Note 17. Commitments and Contingencies

Litigation

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.

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheet.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary of the Company’s commitments at December 31, 2015 and 2014 is as follows (dollars in thousands):

(Dollars In Thousands)	2015		2014

Commitments to extend credit	$	21,326	$	21,137

Unfunded commitments under lines of credit		64,111		55,280

Standby letters of credit		5,264		5,563

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit may or may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

The Company is required to maintain certain required reserve balances with the Federal Reserve Bank. At December 31, 2015 and 2014, these reserve balances amounted to $3.9 million and $3.7 million, respectively.

The Company from time to time may have cash and cash equivalents on deposit with financial institutions that exceed federally insured limits. Balances in excess of FDIC insured amounts totaled $3.8 million and $4.1 million at December 31, 2015 and 2014, respectively.

Purchase Obligation

On November 1, 2014, the Company entered into a marketing agreement involving naming, advertising, and sponsorship rights. The agreement was for three years, with an option for an additional two years. In relation to this agreement, the Company expensed $47.8 thousand and $9.5 thousand in 2015 and 2014, respectively. The agreement obligates the Company to pay $52.8 thousand in 2016, and $47.9 thousand in 2017 for these rights.

Note 18. Regulatory Restrictions

Dividends

The Company, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any company when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Company. At December 31, 2015, there were $443 thousand in retained earnings available from which to pay dividends to common stockholders.

Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in January 1, 2019. As part of the new requirements, the Common Equity Tier 1 Capital is calculated and utilized in the assessment of capital for all institutions. Capital amounts and ratios for December 31, 2014 were calculated using the Basel I rules, which were effective until January 1, 2015. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2015 and 2014, the most recent regulatory notifications categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. In July 2013, the Federal Reserve Bank issued revised final rules that 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. 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.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I common equity, and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the applicable regulations. As of December 31, 2015, management believes the Bank met all capital adequacy requirements to which it was subject.

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

HomeTown Bank December 31, 2015	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	54,890		13.80	%	$	31,822		8.00	%	$	39,778		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)	$	51,556		12.96	%	$	17,900		4.50	%	$	25,855		6.50	%
Tier I Capital (to Risk-Weighted Assets)	$	51,592		12.97	%	$	23,867		6.00	%	$	31,822		8.00	%
Tier I Capital (to Average Assets)	$	51,592		10.83	%	$	19,053		4.00	%	$	23,816		5.00	%

HomeTown Bank December 31, 2014	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	45,695		13.00	%	$	28,125		8.00	%	$	35,157		10.0	%
Tier I Common Equity (to Risk-Weighted Assets)	NA		NA			NA		NA			NA		NA
Tier I Capital (to Risk-Weighted Assets)	$	42,363		12.05	%	$	14,063		4.00	%	$	21,094		6.0	%
Tier I Capital (to Average Assets)	$	42,363		10.00	%	$	16,952		4.00	%	$	21,190		5.0	%

Note 19. Transactions with Related Parties

The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:

(Dollars In Thousands)	2015			2014

Balance, beginning	$	8,048		$	8,280
New loans		3,116			3,859
Repayments		(4,040	)		(4,091	)
Balance, ending	$	7,124		$	8,048

Aggregate deposit balances with related parties at December 31, 2015 and 2014 were $16.3 million and $6.4 million, respectively.

Note 20. Capital Transactions

On June 28, 2013, HomeTown Bankshares Corporation completed a $14,000,000 private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated April 17, 2013 and amended thereafter, the Company sold 14,000 shares of its 6.0% Series C Non-Cumulative Perpetual Convertible Preferred Stock at a price of $1,000 per share. The convertible preferred stock pays quarterly dividends equivalent to six percent (6.0%) per annum, and is convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment. The Company paid $840 thousand in dividends on Series C preferred stock in 2015 and 2014, respectively. For the year 2015, 400 shares of preferred stock were converted to 64,000 shares of common stock.

Note 21. Reclassifications Out of Other Comprehensive Income

Items not reclassified in their entirety to net income for the years ended December 31, 2015 and 2014 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Years Ended December 31,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2015		2014
Available for sale securities
Realized gains on sales of securities held for sale during the period	$	52	$	128	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		18		44	Income tax expense
	$	34	$	84	Net income

Note 22. Condensed Parent Company Financial Information

Financial information pertaining only to HomeTown Bankshares Corporation follows. The parent company was formed on September 4, 2009.

CONDENSED BALANCE SHEETS
Dollars In Thousands	December 31, 2015		December 31, 2014
Assets
Cash and due from banks	$	1,576	$	408
Investment in bank subsidiary		51,951		42,817
Other assets		7		—
Total assets	$	53,534	$	43,225
Liabilities and Stockholders’ Equity
Accrued interest payable	$	18	$	—
Other liabilities		305		—
Subordinated notes		7,194		—
Total liabilities		7,517		—
Stockholders’ equity:
Total stockholders’ equity		46,017		43,225
Total liabilities and stockholders’ equity	$	53,534	$	43,225

CONDENSED STATEMENTS OF INCOME
Dollars In Thousands	For the year ended December 31, 2015		For the year ended December 31, 2014
Dividend from Bank subsidiary	$	630	$	—
Income		630		—

Interest expense		19		—
Other expenses		181		143
Expenses		200		143
Net income (loss) before income taxes		430		(143	)
Income tax benefit		68		48
Net income (loss) before equity in undistributed net income of subsidiary		498		(95	)
Undistributed net income of subsidiary		3,056		3,510
Net Income	$	3,554	$	3,415

CONDENSED STATEMENTS OF CASH FLOWS
Dollars In Thousands	For the year ended December 31, 2015			For the year ended December 31, 2014
Cash flows from operating activities:
Net income	$	3,554		$	3,415
Equity in undistributed net income of subsidiary bank		(3,056	)		(3,510	)
Amortization expense on subordinated notes		1			—
Increase in other assets		(7	)		—
Increase in interest payable		18			—
Increase in other liabilities		305			(9	)
Net cash flows provided by (used in) operating activities		815			(104	)

Cash flows from investing activities:
Capital contribution to bank subsidiary		(6,000	)		—
Net cash flows used in investing activities		(6,000	)		—

Cash flows from financing activities:
Issuance of subordinated notes		7,193			—
Preferred dividend payment		(840	)		(840	)
Net cash flows provided by (used in) financing activities		6,353			(840	)

Net increase (decrease) in cash and cash equivalents		1,168			(944	)

Cash and cash equivalents, beginning		408			1,352
Cash and cash equivalents, ending	$	1,576		$	408

Note 23. Subsequent Events

On February 25, 2016, 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 March 15, 2016 to preferred shareholders of record February 29, 2016. On February 26, 2016, the Bank added $473 thousand to other real estate owned. At December 31, 2015, the related loan was included in “Current” in Note 3 and “Pass in Note 4. The borrower was an independent church and the membership voted to disband in the first quarter of 2016, prompting the Bank to negotiate a deed-in-lieu of foreclosure. Additional collateral in the form of an assigned note receivable was received as part of the negotiation. No loss was recognized when the loan was transferred to other real estate owned. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date of this filing.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

HomeTown Bankshares Corporation

Roanoke, Virginia

We have audited the accompanying consolidated balance sheets of HomeTown Bankshares Corporation and subsidiary (the “Corporation”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HomeTown Bankshares Corporation and subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 30, 2016

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures by the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the CEO and 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.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

HomeTown Bankshares Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. HomeTown Bankshares Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of HomeTown Bankshares’ internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in 2013. Based on this assessment, management believes that, as of December 31, 2015, HomeTown Bankshares’ internal control over financial reporting was effective.

This annual report does not include an attestation report of HomeTown Bankshares’ registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by HomeTown Bankshares’ registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit filers to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The information required by this item relating to the Company’s directors and nominees is included under the captions “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders and is incorporated herein by reference.

The information required by this item relating to the Bank’s executive officers is included under the caption “Executive Officers of the Registrant” in Part I of this report.

The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its directors and executive officers, including its Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is posted to the Investor Relations section of the Company’s website at www.hometownbank.com. In addition, a copy of the Code of Ethics may be obtained without charge by written request to the Company’s corporate secretary.

The information required by this item relating to the Company’s Audit Committee is included under the captions “Item 1: Election of Directors,” “Audit Committee Matters” and “—Audit Committee Report” in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required to be disclosed in this item 11 is included under the caption “Executive Compensation” of the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required to be disclosed in this item 12 is relating to security ownership of certain beneficial owners and management is included under the caption “Common Stock Ownership” in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders and is incorporated herein by reference.

Equity Compensation Plans

The following table summarizes information concerning the Company’s equity compensation plans as of December 31, 2015.

Plan Category

Number of securities to be

issued upon exercise of

outstanding options,

warrants and rights (1)

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities

remaining available for

future issuance under

equity compensation

plans

Equity compensation plans approved by security holders

546,460

(2)

8.62

3,540

(3)

Equity compensation plans not approved by security holders

N/A

66,804

(4)

(1)

Excludes restricted stock awards currently vesting under the Restricted Stock Plan. See Part II, Item 8, Note 12 for a detailed discussion of the Restricted Stock Plan.

(2)	Represents options to purchase common stock outstanding under the 2005 Stock Option Plan. See Part II, Item 8, Note 12 for a detailed discussion of the Restricted Stock Plan.

(3)	Represents shares available for future issuance under the 2005 Stock Option Plan

(4)	Represents shares available for future issuance under the Restricted Stock Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item relating to review, approval or ratification of transactions with related persons is included under the caption “Certain Relationships and Related Transactions,” and the information required by this item relating to director independence is included under the caption “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Bank’s Proxy Statement for the 2016 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required to be disclosed in this item 14 is included under the captions “Audit Committee Matters” and “Item III: Ratification of Independent Auditors” in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements:

Consolidated Balance Sheets as of December 31, 2015 and 2014

Consolidated Statements of Income for the Years Ended December 31, 2015 and 2014

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015 and 2014

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015 and 2014

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014

Report of Independent Registered Public Accounting Firm

Exhibit

Number

3.1	Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.

3.2	By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).

4.1	See Exhibit 3.1.

10.2*	Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.

10.3*	Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.

10.4*	HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.

10.5	Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.

10.6*	Employment Agreement dated May 1, 2006 between HomeTown Bank and C. W. Maness, Jr., incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.

10.7	Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.

10.8*	Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2010.

10.9	Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.

10.10*	Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.

10.11*	Supplemental Executive Retirement Plan by and between Hometown Bank and Susan K. Still incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013.

10.12*	Supplemental Executive Retirement Plan by and between Hometown Bank and Charles W. Maness, Jr incorporated herein by reference to Exhibit 10.12 to Form 10-K for the year ended December 31, 2013.

21	Subsidiaries of the Registrant

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 Annual Report on Form 10-K for the year ended December 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2015 and 2014; (ii) Consolidated Statements of Income for the years ended December 31, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, and 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements.

*	Denotes management contract or compensatory plan or arrangement.
**	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

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HOMETOWN BANKSHARES CORPORATION

Date: March 30, 2016	By:	/S/ SUSAN K. STILL
		Susan K. Still President Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/S/ SUSAN K. STILL	Director, President, and	March 30, 2016
Susan K. Still	Chief Executive Officer (principal executive officer)

/S/ GEORGE B. CARTLEDGE, JR.	Director	March 30, 2016
George B. Cartledge, Jr.


/S/ NANCY H. AGEE	Director	March 30, 2016
Nancy H. Agee


/S/ WARNER N. DALHOUSE	Director	March 30, 2016
Warner N. Dalhouse


/S/ MARC S. FINK	Director	March 30, 2016
Marc S. Fink


/S/ DANIEL D. HAMRICK	Director	March 30, 2016
Daniel D. Hamrick


/S/ WILLIAM R. RAKES	Director	March 30, 2016
William R. Rakes


/S/ JAMES M. TURNER, JR.	Director	March 30, 2016
James M. Turner, Jr.


/S/ CHARLES W. MANESS, JR.	Chief Financial Officer	March 30, 2016
Charles W. Maness, Jr.	(principal accounting and financial officer)

INDEX TO EXHIBITS

Exhibit Number	Description

3.1	Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.

3.2	By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).

4.1	See Exhibit 3.1.

10.2*	Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.

10.3*	Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.

10.4*	HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.

10.5	Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.

10.6*	Employment Agreement dated May 1, 2006 between HomeTown Bank and C. W. Maness, Jr., incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.

10.7	Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.

10.8*	Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2010.

10.9	Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.

10.10*	Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.

10.11*	Supplemental Executive Retirement Plan by and between Hometown Bank and Susan K. Still incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013.

10.12*	Supplemental Executive Retirement Plan by and between Hometown Bank and Charles W. Maness, Jr incorporated herein by reference to Exhibit 10.12 to Form 10-K for the year ended December 31, 2013.

21	Subsidiaries of the Registrant [Exhibit 21 attached]

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 Annual Report on Form 10-K for the year ended December 31, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2015 and 2014; (ii) Consolidated Statements of Income for the years ended December 31, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, and 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements.

*	Denotes management contract or compensatory plan or arrangement.

**	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.

HomeTown Bankshares Corp - FORM 10-K - March 30, 2016

Attached files

HomeTown Bankshares Corp Reports