HomeTown Bankshares Corp - FORM 10-Q

Attached files

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended June 30, 2016.

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

for the transition period from to .

Commission File Number: 333-158525

HOMETOWN BANKSHARES CORPORATION

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

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

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

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

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☐

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

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

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

As of August 12, 2016, 5,763,944 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015		3

Consolidated Statements of Income for the Three and Six months Ended June 30, 2016 and 2015 (unaudited)		4

Consolidated Statements of Comprehensive Income for the Three and Six months Ended June 30, 2016 and 2015 (unaudited)		5

Consolidated Statements of Cash Flows for the Six months Ended June 30, 2016 and 2015 (unaudited)		6

Notes to Consolidated Financial Statements (unaudited)		7

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33

Item 4.	CONTROLS AND PROCEDURES	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosure	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

SIGNATURES		36

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

HomeTown Bankshares Corporation

Consolidated Balance Sheets

June 30, 2016 and December 31, 2015

Dollars In Thousands, Except Share and Per Share Data	June 30, 2016			December 31, 2015
	(Unaudited)			*
Assets
Cash and due from banks	$	28,101		$	28,745
Federal funds sold		954			1,329
Securities available for sale, at fair value		54,498			52,544
Restricted equity securities, at cost		2,479			2,535
Loans held for sale		915			1,643
Loans, net of allowance for loan losses of $3,449 in 2016 and $3,298 in 2015		390,219			364,060
Property and equipment, net		13,726			14,008
Other real estate owned, net of valuation allowance of $420 in 2016 and in 2015		4,337			5,237
Bank owned life insurance		6,371			6,285
Accrued income		2,071			2,057
Other assets		1,718			942
Total assets	$	505,389		$	479,385

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	83,414		$	77,268
Interest-bearing		349,861			322,278
Total deposits		433,275			399,546
Federal Home Loan Bank borrowings		14,650			22,000
Subordinated notes		7,209			7,194
Other borrowings		896			2,361
Accrued interest payable		411			372
Other liabilities		1,512			1,521
Total liabilities		457,953			432,994

Commitments and contingencies

Stockholders’ equity:
Convertible preferred stock, no par value; Series C authorized 20,000 shares, issued and outstanding none at June 30, 2016 and 13,600 at December 31, 2015		–			12,893
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 5,629,767(includes 31,104 restricted shares) at June 30, 2016 and 3,362,536 (includes 37,848 restricted shares) at December 31, 2015		28,116			16,801
Surplus		17,774			15,484
Common stock dividend distributable		665			–
Retained earnings (deficit)		(247	)		443
Accumulated other comprehensive income		738			396
Total HomeTown Bankshares Corporation stockholders’ equity		47,046			46,017
Non-controlling interest in consolidated subsidiary		390			374
Total stockholders’ equity		47,436			46,391
Total liabilities and stockholders’ equity	$	505,389		$	479,385

*Derived from consolidated audited financial statements.

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the three and six months ended June 30, 2016 and 2015

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
Dollars In Thousands, Except Share and Per Share Data	2016		2015			2016		2015
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Interest and dividend income:
Loans and fees on loans	$	4,337	$	4,047		$	8,593	$	7,946
Taxable investment securities		201		176			405		382
Nontaxable investment securities		101		100			202		203
Dividends on restricted stock		36		35			70		68
Other interest income		26		9			45		18
Total interest and dividend income		4,701		4,367			9,315		8,617
Interest expense:
Deposits		537		465			1,041		913
Subordinated notes		134		–			268		–
Other borrowed funds		70		102			167		194
Total interest expense		741		567			1,476		1,107
Net interest income		3,960		3,800			7,839		7,510
Provision for loan losses		808		–			868		–
Net interest income after provision for loan losses		3,152		3,800			6,971		7,510

Noninterest income:
Service charges on deposit accounts		164		124			318		234
ATM and interchange income		168		146			315		268
Mortgage banking		181		258			356		378
Gains on sales of investment securities, net		209		–			214		40
Other income		151		167			281		310
Total noninterest income		873		695			1,484		1,230

Noninterest expense:
Salaries and employee benefits		1,597		1,619			3,323		3,160
Occupancy and equipment expense		444		439			878		884
Data processing expense		210		205			442		417
Advertising and marketing expense		124		167			218		409
Professional fees		116		111			217		223
Bank franchise taxes		91		65			183		131
FDIC insurance expense		75		84			158		159
Losses on sales and writedowns of other real estate owned, net		91		–			91		–
Other real estate owned expense		25		40			47		70
Directors’ fees		102		59			209		111
Other expense		490		433			861		767
Total noninterest expense		3,365		3,222			6,627		6,331
Net income before income taxes		660		1,273			1,828		2,409
Income tax expense		434		381			787		727
Net income		226		892			1,041		1,682
Less net income attributable to non-controlling interest		2		29			16		43
Net income attributable to HomeTown Bankshares Corporation		224		863			1,025		1,639
Effective dividends on preferred stock		204		210			408		420
Net income available to common stockholders	$	20	$	653		$	617	$	1,219
Basic earnings per common share	$	0.00	$	0.19	*	$	0.17	$	0.36	*
Diluted earnings per common share	$	0.00	$	0.15	*	$	0.11	$	0.28	*
Weighted average common shares outstanding		3,557,763		3,428,085	*		3,529,605		3,425,644	*
Diluted weighted average common shares outstanding		5,780,122		5,757,685	*		5,776,832		5,755,244	*

*Restated for the 4% stock dividend distributed July 11, 2016

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the three and six months ended June 301, 2016 and 2015

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015
Dollars In Thousands	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net income	$	226		$	892		$	1,041		$	1,682

Other comprehensive income (loss):
Net unrealized holding gains (losses) on securities available for sale during the period		422			(567	)		732			(255	)
Deferred income tax (expense) benefit on unrealized holding gains (losses) on securities available for sale		(143	)		192			(249	)		86
Reclassification adjustment for gains on sales of investment securities included in net income		(209	)		–			(214	)		(40	)
Tax expense related to realized gains on securities sold		71			–			73			14
Total other comprehensive income (loss)		141			(375	)		342			(195	)

Comprehensive income		367			517			1,383			1,487
Less: Comprehensive income attributable to the non-controlling interest		2			29			16			43
Comprehensive income attributable to HomeTown Bankshares Corporation	$	365		$	488		$	1,367		$	1,444

See Notes to Consolidated Financial Statements

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the six months ended June 30, 2016 and 2015

	For the Six Months Ended June 30,
Dollars in Thousands	2016			2015
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income	$	1,041		$	1,682
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		379			377
Provision for loan losses		868			–
Amortization of premium on securities, net		286			287
Amortization of discount on subordinated notes		15			–
Gains on sales of loans held for sale		(255	)		(284	)
Losses on sales and writedowns of other real estate, net		91			–
Gains on sales of investment securities, net		(214	)		(40	)
Increase in value of life insurance contracts		(86	)		(76	)
Stock compensation expense		75			68
Originations of loans held for sale		(10,253	)		(12,481	)
Proceeds from sales of loans held for sale		11,236			12,625
Changes in assets and liabilities:
Accrued income		(14	)		48
Other assets		(776	)		(313	)
Deferred taxes, net		221			100
Accrued interest payable		39			93
Other liabilities		(406	)		(910	)
Net cash flows provided by operating activities		2,247			1,176
Cash flows from investing activities:
Net (increase) decrease in federal funds sold		375			(148	)
Purchases of available for sale securities		(10,794	)		(1,748	)
Sales, maturities, and calls of available for sale securities		9,286			6,878
(Purchase) redemption of restricted equity securities, net		56			(219	)
Net increase in loans		(27,500	)		(22,415	)
Proceeds from sales of other real estate		1,282			114
Purchases of bank owned life insurance		–			(2,500	)
Purchases of property and equipment		(97	)		(269	)
Net cash flows used in investing activities		(27,392	)		(20,307	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		6,146			2,504
Net increase in interest-bearing deposits		27,583			12,118
Net increase (decrease) in FHLB borrowings		(7,350	)		5,750
Net increase (decrease) in other borrowings		(1,465	)		130
Net increase in equity of non-controlling interest		–			317
Preferred stock dividend payment		(408	)		(420	)
Cash in lieu of fractional shares		(5	)		–
Net cash flows provided by financing activities		24,501			20,399
Net increase (decrease) in cash and cash equivalents		(644	)		1,268
Cash and cash equivalents, beginning		28,745			13,795
Cash and cash equivalents, ending	$	28,101		$	15,063
Supplemental disclosure of cash flow information:
Cash payments for interest	$	1,437		$	1,014
Cash payments for income taxes	$	1,253		$	1,356
Supplemental disclosure of noncash investing activities:
Change in unrealized gains on available for sale securities	$	518		$	(295	)
Transfer from loans to other real estate	$	473		$	–
Conversion of Preferred Stock to Common Stock	$	12,893		$	–

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

The consolidated financial statements as of June 30, 2016 and for the periods ended June 30, 2016 and 2015 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

Management believes that all interim adjustments for the period ended June 30, 2016 are of a normal recurring nature. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for such interim periods. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2015, included in the Company’s Form 10-K for the year ended December 31, 2015. Interim financial performance is not necessarily indicative of performance for the full year.

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

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

The Company elected the early adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The tax effect of the expiration of nonqualified stock options was recognized in the second quarter as a discrete item when the expiration occurred and increased income tax expense by $236 thousand. The Company’s other accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K. Please refer to Form 10-K for these policies.

Note 2. Investment Securities

The amortized cost and fair value of available-for-sale securities as of June 30, 2016 and December 31, 2015, are as follows:

(Dollars In Thousands)	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	13,598	$	300	$	(40	)	$	13,858
Mortgage-backed securities and CMO’s		21,395		211		(28	)		21,578
Corporate securities		2,500		–		–			2,500
Municipal securities		15,887		686		(11	)		16,562
	$	53,380	$	1,197	$	(79	)	$	54,498

(Dollars In Thousands)	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	16,899	$	227	$	(107	)	$	17,019
Mortgage-backed securities and CMO’s		18,289		75		(174	)		18,190
Municipal securities		16,756		594		(15	)		17,335
	$	51,944	$	896	$	(296	)	$	52,544

U. S. Government and federal agency securities: The unrealized losses on ten of the Company’s investments in obligations of the U. S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2016.

Mortgage-backed securities and CMO’s: The unrealized losses on eight of the Company’s investments in government-sponsored entity mortgage-backed securities and collateralized mortgage obligations (“CMOs”) were caused by increases in market interest rates over the yields available at the time the securities were purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2016.

Corporate securities: The Company had no investments with unrealized losses in corporate securities at June 30, 2016.

Municipal securities: The unrealized losses on four of the Company’s investments in municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates, credit spreads, and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2016.

The following tables demonstrate the unrealized loss position of available-for-sale securities at June 30, 2016 and December 31, 2015. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

	June 30, 2016
	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	$	692	$	(1	)	$	3,799	$	(39	)	$	4,491	$	(40	)
Mortgage-backed securities and CMO’s		280		(2	)		1,703		(26	)		1,983		(28	)
Municipal securities		863		(11	)		270		-			1,133		(11	)
	$	1,835	$	(14	)	$	5,772	$	(65	)	$	7,607	$	(79	)

	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	$	1,999	$	(24	)	$	4,924	$	(83	)	$	6,923	$	(107	)
Mortgage-backed securities and CMO’s		10,326		(114	)		3,069		(60	)		13,395		(174	)
Municipal securities		805		(10	)		526		(5	)		1,331		(15	)
	$	13,130	$	(148	)	$	8,519	$	(148	)	$	21,649	$	(296	)

There are twenty-two debt securities with fair values totaling $7.6 million considered temporarily impaired at June 30, 2016. As of June 30, 2016, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

The Company realized gains of $219 thousand and $5 thousand of losses on sales of securities in the first six months of 2016. The Company realized gains of $55 thousand and $15 thousand of losses during the same period last year.

The amortized cost and fair values of investment securities available for sale at June 30, 2016, by contractual maturity are as follows:

(Dollars In Thousands)	Amortized Cost		Fair Value
One year or less	$	132	$	133
Over one through five years		1,213		1,232
Over five through ten years		12,694		12,845
Greater than 10 years		39,341		40,288
	$	53,380	$	54,498

Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at June 30, 2016 and December 31, 2015 were as follows:

(Dollars In Thousands)	June 30, 2016			December 31, 2015
Construction loans:
Residential	$	12,472		$	11,779
Land acquisition, development & commercial		21,057			27,440
Real estate:
Residential		106,622			100,268
Commercial		160,901			140,952
Commercial, industrial & agricultural		55,719			53,012
Equity lines		29,235			26,376
Consumer		7,662			7,531
Total		393,668			367,358
Less allowance for loan losses		(3,449	)		(3,298	)
Loans, net	$	390,219		$	364,060

The past due and nonaccrual status of loans as of June 30, 2016 was as follows:

(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction loans:
Residential	$	−	$	−	$	−	$	−	$	12,472	$	12,472	$	−
Land acquisition, development & commercial		−		−		8		8		21,049		21,057		8
Real estate:
Residential		-		225		577		802		105,820		106,622		577
Commercial		571		1,298		−		1,869		159,032		160,901		1,652
Commercial, industrial & agricultural		33		−		−		33		55,686		55,719		11
Equity lines		−		106		−		106		29,129		29,235		−
Consumer		26		2		−		28		7,634		7,662		−
Total	$	630	$	1,631	$	585	$	2,846	$	390,822	$	393,668	$	2,248

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

There were no loans past due ninety days or more and still accruing interest as of June 30, 2016. There were two loans, totaling $842 thousand, which were past due ninety days or more and still accruing interest at December 31, 2015.

Impaired loans, which include TDR’s of $6.6 million, and the related allowance at June 30, 2016, were as follows:

June 30, 2016

With no related allowance:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

771

−

494

(17

)

Commercial

8,707

9,488

−

8,412

173

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with no allowance

9,490

10,271

−

8,918

156

June 30, 2016

With an allowance recorded:

(Dollars In Thousands)

Recorded

Investment

in Loans

Unpaid

Principal

Balance

Allowance

Average

Balance

Total

Loans

Interest

Income

Recognized

Construction loans:

Residential

−

Land acquisition, development & commercial

−

Real estate:

Residential

−

Commercial

122

125

−

Commercial, industrial & agricultural

−

Equity lines

−

Consumer

−

Total loans with an allowance

122

125

−

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

−

Troubled Debt Restructurings

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.6 million at June 30, 2016. This compares with $6.7 million in total restructured loans at December 31, 2015. Four of the six loans totaling $6.3 million were not on nonaccrual status at June 30, 2016. The other two loans totaling $244 thousand were on nonaccrual status at the end of the second quarter of 2016. There is one TDR in the amount of $564 thousand past due 46 days at June 30, 2016. The other five TDR’s were current with their restructured terms at June 30, 2016.

No loans were modified in a TDR during the first six months of 2016.

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

	Loans modified as TDR's For the six months ended June 30, 2015
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
			(Dollars in Thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real estate loans:
Residential		—		—		—
Commercial		1		260		255
Commercial, industrial, agricultural		—		—		12
Equity lines		—		—		—
Consumer		—		—		—
Total Loans		1	$	260	$	267

The loan identified above in the table restructured into two TDR’s during the six months ended June 30, 2015. It was included in substandard nonaccrual loans and impaired loans at the end of 2014.

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

Note 4. Allowance for Loan Losses

The following table presents, as of June 30, 2016, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

June 30, 2016	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	$	83	$	−		$	−	$	3		$	86	$	−	$	86	$	12,472	$	−	$	12,472
Land acquisition, development & commercial		187		(2	)		−		(42	)		143		−		143		21,057		−		21,057
Real estate:
Residential		1,047		−			45		(213	)		879		−		879		106,622		771		105,851
Commercial		1,001		(606	)		−		1,119			1,514		17		1,497		160,901		8,829		152,072
Commercial, industrial & agricultural		531		(33	)		−		(75	)		423		−		423		55,719		12		55,707
Equity lines		277		(99	)		9		100			287		−		287		29,235		−		29,235
Consumer		85		(45	)		14		44			98		−		98		7,662		−		7,662
Unallocated		87		−			−		(68	)		19		−		19		−		−		−
Total	$	3,298	$	(785	)	$	68	$	868		$	3,449	$	17	$	3,432	$	393,668	$	9,612	$	384,056

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

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

Loans by credit quality indicators as of June 30, 2016 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	12,472	$	−	$	−	$	−	$	12,472
Land acquisition, development & commercial		21,049		−		−		8		21,057
Real estate loans:
Residential		105,851		−		194		577		106,622
Commercial		157,818		−		1,431		1,652		160,901
Commercial, industrial, agricultural		55,008		700		−		11		55,719
Equity lines		29,235		−		−		−		29,235
Consumer		7,658		−		4		−		7,662
Total Loans	$	389,091	$	700	$	1,629	$	2,248	$	393,668

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 June 30, 2016 and December 31, 2015, the Company had no loans classified as Doubtful or Loss.

Note 5. Foreclosed Properties

Changes in foreclosed properties for the six months ended June 30, 2016 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	5,657		$	(420	)	$	5,237
Additions		473			—			473
Writedowns		—			—			—
Sales		(1,373	)		—			(1,373	)
Balance at the end of the period	$	4,757		$	(420	)	$	4,337

Changes in foreclosed properties for the six months ended June 30, 2015 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	7,408		$	(422	)	$	6,986
Additions		—			—			—
Writedowns		—			—			—
Sales		(114	)		—			(114	)
Balance at the end of the period	$	7,294		$	(422	)	$	6,872

The major classifications of other real estate owned in the consolidated balance sheets at June 30, 2016 and December 31, 2015 were as follows:

(Dollars In Thousands)	June 30, 2016		December 31, 2015
Residential lots	$	2,472	$	2,520
Residential development		423		423
Commercial lots		90		90
Commercial buildings		1,352		2,204
Total Other Real Estate Owned	$	4,337	$	5,237

There were no residential real estate loans in the process of foreclosure at June 30, 2016 or December 31, 2015.

Other real estate owned related expenses in the consolidated statements of income for the three and six months ended June 30, 2016 and June 30, 2015 include:

(Dollars In Thousands)	Three months Ended June 30, 2016		Three months Ended June 30, 2015		Six months Ended June 30, 2016		Six months Ended June 30, 2015
Net loss on sales	$	91	$	—	$	91	$	—
Provision for unrealized losses		—		—		—		—
Operating expenses		25		40		47		70
Total Other Real Estate Owned	$	116	$	40	$	138	$	70

Note 6. Stock Based Compensation

The Company recorded stock based compensation expense of $75 thousand and $68 thousand for the years to date June 30, 2016 and 2015, respectively.

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

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. On December 18, 2014, the Board of Directors granted 165 thousand shares which will vest over a five year period. Financial assumptions and variables used to determine the fair value of these stock options are; risk free interest rate of 2.01%, an expected term of 7.5 years, an expected stock price volatility of 26% and a dividend rate of 0%. The fair value of the options was determined to be $2.29 per option. Compensation expense will be charged to income ratably over the vesting period and was $40 thousand year to date June 30, 2016 and $38 thousand year to date June 30, 2015. As of June 30, 2016 there was $247 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 3.50 years. No options were granted during the six months ended June 30, 2016. All previously issued options were fully vested at the end of 2012. At the discretion of the Board of Directors, the stock option plan was not modified for the 4% stock dividend distributed on July 11, 2016.

A summary of option activity under the 2005 stock option plan year to date June 30, 2016 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2015		546,460		$	8.62
Granted		–			–
Exercised		–			–
Expired		(333,960	)		9.09
Forfeited		(6,000	)		6.90
Balance at June 30, 2016		206,500		$	7.90	$	406,630		6.84
Exercisable at June 30, 2016		82,100		$	9.41	$	84,434		4.36

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2016.

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 $35 thousand and $30 thousand for the years to date June 30, 2016 and 2015, respectively. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The Company granted 10,723 and 8,670 shares of restricted stock under the plan during the years to date June 30, 2016 and 2015, respectively. The weighted-average grant date fair value of restricted stock granted in 2016 was $9.45 compared to $7.70 in 2015.

As of June 30, 2016, there was $202 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2021. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	For the six months ended June 30, 2016					For the six months ended June 30, 2015
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		37,848		$	6.24		37,727		$	5.56
Granted		10,723			9.45		8,670			7.70
Vested		(10,938	)		5.65		(10,848	)		5.56
Forfeited		(6,529	)		7.27		–			–
Nonvested at the end of the period		31,104		$	7.34		35,549		$	6.08

The Restricted Stock Plan provides for the adjustment of the total number of shares reserved for issuance under the plan and the number of shares covered by each outstanding Award for stock dividends and stock splits. On July 11, 2016, a 4% stock dividend was distributed and added 5,280 to the total number of shares authorized for issuance and currently raising the total available to 137,280. The 4% stock dividend increases the nonvested number of shares by 1,238 shares to a total nonvested of 32,342 as of July 11, 2016.

Note 7. Fair Value Measurement

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

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

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

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

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

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

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:

(Dollars In Thousands)

Carrying value at June 30, 2016

Description

Balance as of June 30,

2016

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

13,858

–

13,858

–

Mortgage-backed securities and CMO’s

21,578

–

21,578

–

Corporate securities

2,500

–

2,500

–

Municipal securities

16,562

–

16,562

–

(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

17,019

–

17,019

–

Mortgage-backed securities and CMO’s

18,190

–

18,190

–

Municipal securities

17,335

–

17,335

–

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, and discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraisal value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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

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

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015.

(Dollars In Thousands)			Carrying value at June 30, 2016
Description	Balance as of June 30, 2016		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	$	105	$	–	$	–	$	105
Loans held for sale		915		–		915		–
Other real estate owned		4,337		–		448		3,889

(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

At June 30, 2016 and December 31, 2015, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2016:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for June 30, 2016
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	105	Discounted cash flows	Residual cash flows discount rate	6%	-	6%	(6%)

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%)

	$	2,154	Internal evaluations	Internal evaluations	4%	-	35%	(22%)

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 cash flows	Residual cash flows discount rate	6%	-	6%	(6%)

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

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

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At June 30, 2016 and December 31, 2015, management believes the carrying value of federal funds sold approximates estimated market value.

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

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

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Their fair values are measured utilizing independent valuation techniques of similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

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

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

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

Subordinated notes: The fair values is 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).

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

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

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At June 30, 2016 and December 31, 2015, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at June 30, 2016:

(Dollars In Thousands)			Fair value at June 30, 2016
Description	Carrying value as of June 30, 2016		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	$	28,101	$	26,351	$	1,757	$	–	$	28,108
Federal funds sold		954		954		–		–		954
Securities available-for-sale		54,498		–		54,498		–		54,498
Restricted equity securities		2,479		–		2,479		–		2,479
Loans held for sale		915		–		915		–		915
Loans, net		390,219		–		–		393,924		393,924
Bank owned life insurance		6,371		–		6,371		–		6,371
Accrued income		2,071		–		2,071		–		2,071
Financial liabilities
Total deposits		433,275		–		433,602		–		433,602
FHLB borrowings		14,650		–		14,789		–		14,789
Subordinated notes		7,209		–		7,651		–		7,651
Other borrowings		896		–		896		–		896
Accrued interest payable		411		–		411		–		411

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

Note 8. Reclassifications Out of Other Comprehensive Income

Items reclassified in their entirety to net income for the three and six months ended June 30, 2016 and 2015 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Three Months Ended June 30,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2016		2015
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale	$	209	$	−	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		71		−	Income tax expense
	$	138	$	−	Net income

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Six Months Ended June 30,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2016		2015
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale	$	214	$	40	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		73		14	Income tax expense
	$	141	$	26	Net income

Note 9. Earnings per Common Share

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

	For the Three Months Ended June 30,
	2016						2015
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		3,557,763	$	20	$	0.00		3,428,085	*	$	653	$	0.19	*
Series C Preferred Stock Dividends				−							210
Effect of dilutive securities:
Convertible preferred stock		2,213,303		−		−		2,329,600	*		−		(0.04	)*
Dilutive stock options		9,056		−		−		−			−		−
Earnings per common share, diluted		5,780,122	$	20	$	0.00		5,757,685	*	$	863	$	0.15	*

*Restated for 4% common stock dividend distributed July 11, 2016.

	For the Six Months Ended June 30,
	2016							2015
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		3,529,605	$	617	$	0.17			3,425,644	*	$	1,219	$	0.36	*
Series C Preferred Stock Dividends				−								420
Effect of dilutive securities:
Convertible preferred stock		2,238,171		−		(0.08	)		2,329,600	*		−		(0.08	)*
Dilutive stock options		9,056		−		−			−			−		−
Earnings per common share, diluted		5,776,832	$	617	$	0.11			5,755,244	*	$	1,639	$	0.28	*

*Restated for 4% common stock dividend distributed July 11, 2016.

Nonvested restricted shares were included in weighted average common shares outstanding for computing basic earnings per share, as the holder has voting rights and would share in a stock or cash dividend during the vesting period.

Note 10. Subsequent Events

The 4% common stock dividend declared by the Board of Directors on May 10, 2016 to holders of record June 9, 2016 was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177 to a total of 5,763,944.

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

Forward-looking Statements

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

The Company’s forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit, loan, and investment products and other financial services; changes in real estate values; changes in the quality or composition of the Company’s loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Company’s ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties. The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2015. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.

Our Business

HomeTown Bankshares provides a full complement of consumer and commercial banking services to its primary service area which includes the Roanoke Valley, the New River Valley and Smith Mountain Lake. The Company serves these markets through a network of six branches, seven ATM’s, HomeTown Mortgage and HomeTown Investments. A high level of responsive and personal service coupled with local decision-making are the hallmarks of the Company’s customer oriented strategy. The Company offers a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, residential and commercial mortgages, home equity loans, consumer installment loans, commercial loans, lines and letters of credit. In addition to its main office, the Company has offices in Franklin County, Virginia at Westlake; in the town of Christiansburg, Virginia at 2950 Market Street; in Roanoke County, Virginia at the intersection of Colonial Avenue and Virginia Route 419; in the City of Roanoke, Virginia at 3521 Franklin Road; and in the City of Salem, Virginia at 852 West Main Street. HomeTown Bank, with a 49% interest in the joint venture HomeTown Residential Mortgage, LLC, operates a dedicated mortgage office on Colonial Ave., next to the existing branch. The Company has a secure Operations Center at 4633 Brambleton Avenue in Roanoke.

HomeTown Investments provides diverse investment products and financial advisory services to existing and prospective customers. These products and services provide another source of revenue for the Company. Investment and insurance products and services are offered through an unaffiliated entity 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.

The Private Wealth Group offers 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.

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

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 of the Notes to Financial Statements in the Annual Report for the year ended December 31, 2015. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses.

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

The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a detailed quarterly analysis of the allowance based on the Company’s historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and economic trends. These are generally grouped by homogeneous loan pools. Allowances for impaired loans are generally determined based on collateral values less cost to sell, or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.

Discussion of Operations

Executive Summary

HomeTown Bankshares Corporation, surpassed $500 million in assets at June 30, 2016, with strong growth in both loans and core deposits. The Company reported net income attributable to HomeTown Bankshares Corporation of $224 thousand for the second quarter ended June 30, 2016 compared to $801 thousand for the previous quarter and $863 thousand for the comparative period in 2015. Net Income attributable to HomeTown Bankshares Corporation for the first six months of 2016 was $1.03 million compared to $1.64 million for the first six months of 2015. Earnings per share on a fully diluted basis were $0.00 for the second quarter of 2016 and $0.11 per share for the six months ended June 30, 2016 compared to $0.15 and $0.28 per share, respectively, for the same periods in 2015. Prior periods per share numbers have been restated to reflect the 4% stock dividend declared by the Board of Directors on May 10, 2016 to holders of record June 9, 2016 and distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177 to a total of 5,763,944 on July 11, 2016.

Profitability was lower in the second quarter due predominantly to additional loan loss provision expense to replenish the reserve for the partial charge off of $606 thousand of a loan extended in 2008. The loan had performed as agreed until the second quarter of 2016. The specific loan loss provision attributed to this aforementioned loan reduced net income by $400 thousand after taxes. In addition, the Company incurred additional tax expense of $236 thousand due to the expiration of stock options in the second quarter that were issued in 2006 and were never exercised. This charge was due to the reversal of tax benefits recorded previously that cannot be realized due to the options expiring. These were the primary contributors to the reduction in earnings through June 30, 2016.

Three Months Ended June 30, 2016

Net income attributable to HomeTown Bankshares was $224 thousand for the second quarter of 2016, varying unfavorably from the previous quarter by $577 thousand and the same quarter in 2015 by $639 thousand. The specific items mentioned in the previous paragraph accounted for $636 thousand of the unfavorable variances – extra provision for loan losses after tax of $400 thousand and deferred tax write off of $236 thousand. Net interest income and noninterest income for the second quarter of 2016 varied favorably from the previous quarter and the same quarter last year. Net interest income for the three months ended June 30, 2016 was $81 thousand greater than the first quarter of 2016 and $160 thousand more than the second quarter of 2015. Noninterest income rose $262 thousand over the prior quarter and $178 thousand over the same quarter in 2015. Higher net interest income and noninterest income was partially negated by increased noninterest expense.

Net interest income for the three months ended June 30, 2016 totaled $4.0 million, and was $160 thousand or 4.2% greater than the same quarter in the prior year. The expansion of the loan portfolio provided $442 thousand in additional interest income, which was offset by $149 thousand from lower loan yields. Average loans for the quarter were $386 million, $37.9 million or 10.9% more than the second quarter of 2015. Excess funds from increased liquidity were placed in interest bearing bank accounts until needed to fund further loan growth and the expansion of the investment portfolio. Average interest bearing deposits with banks were $5.9 million greater for the second quarter of 2016 than for the same quarter in 2015.

Deposits and proceeds from the subordinated notes issued in December 2015 funded the expansion of the loan portfolio. The total of average interest bearing and non-interest bearing deposits for the second quarter of 2016 totaled $424 million, an increase of $54.3 million over the average for the same quarter in 2015. Average subordinated debt for the three months ended June 30, 2016 was $7.2 million compared to none for the three months ended June 30, 2015.

The net interest margin was 3.55%, 3.62%, and 3.80% for the three months ended June 30, 2016, March 31, 2016, and June 30, 2015, respectively. The reversal of interest on two new nonaccrual loans accounted for 5 of the 7 basis point decline from the first quarter of 2016 to the second quarter. While deposits are the major source of funds, their levels fluctuate. The subordinated notes were issued at the end of 2015 to provide a more stable source of liquidity to fund earning asset growth. The cost of the subordinated notes accounted for 12 basis points of the 25 basis points drop for the second quarter of 2016 compared to the same quarter last year. The remainder of the decrease in the net interest margin was due to spread compression as the yield on earning assets declined while the cost of funds rose. The downward pressure on rates stemming from competition in the market place contributed to lower loan yields. A CD promotion, used to generate funding, in June 2015 contributed to higher costs of time deposits for the second quarter of 2016 compared to the second quarter last year. There were a few downward adjustments of other interest bearing deposit rates since June 30, 2015. Management does not expect any additional downward adjustments in 2016, and, in fact, rates paid on deposits products may rise. Management decreased the average level of Federal Home Loan Bank borrowings by $10.8 million. Federal Home Loan Bank borrowings are generally more expensive than interest bearing deposits, and reducing reliance on them as a funding source favorably impacted the funding mix.

The low interest rate environment is expected to continue to put pressure on the margin. The Federal Open Market Committee in its July 27, 2016 press release stated that “…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.” The Company currently expects one rate increase later this year and two next year.

	For the Three Months Ended June 30, 2016								For the Three Months Ended June 30, 2015
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	1,479		$	2		0.39	%	$	1,135		$	1		0.13	%
Deposits in banks		10,950			24		0.89			5,061			8		0.65
Securities, taxable		38,665			201		2.08			34,723			176		2.04
Securities, nontaxable (1)		15,066			101		4.06			14,662			100		4.17
Restricted equity securities		2,559			36		5.60			2,815			35		5.02
Loans held for sale		466			4		3.74			706			7		3.89
Loans (1)		385,531			4,333		4.52			347,659			4,040		4.66
Total earnings assets		454,716			4,701		4.21			406,761			4,367		4.36
Less: Allowance for loan losses		(3,404	)							(3,322	)
Total non-earning assets		47,568								41,735
Total Assets	$	498,880							$	445,174

Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	77,437		$	27		0.14	%	$	80,269		$	31		0.16	%
Money market savings		73,118			44		0.24			62,754			41		0.26
Regular savings		41,112			38		0.37			35,895			36		0.41
Time Deposits		146,506			428		1.17			137,488			357		1.04
FHLB borrowings		17,048			65		1.51			27,824			94		1.35
Subordinated notes		7,204			134		7.36			—			—		—
Other borrowings		1,112			5		1.83			1,781			8		1.78
Total interest bearing liabilities		363,537			741		0.82			346,011			567		0.66
Non-interest bearing liabilities:
Demand deposits		85,645								53,076
Other liabilities		2,034								1,378
Total liabilities		451,216								400,465
Total HomeTown Bankshares Corporation stockholders’ equity		47,280								44,365
Non-controlling interest in consolidated subsidiary		384			—					344			—
Total Liabilities and Stockholders’ Equity	$	498,880			741				$	445,174			567
Net interest income				$	3,960							$	3,800
Interest rate spread							3.39								3.70
Interest expense to average earning assets							0.66								0.56
Net interest margin							3.55	%							3.80	%

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

	Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

	Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	1		$	1		$	—
Deposits in banks		16			4			12
Securities, taxable		25			4			21
Securities, nontaxable		1			(4	)		5
Restricted equity securities		1			4			(3	)
Loans held for sale		(3	)		(1	)		(2	)
Loans		293			(149	)		442
Total interest income		334			(141	)		475

Interest expense:
Interest bearing liabilities:
Checking		(4	)		(3	)		(1	)
Money market savings		3			(4	)		7
Regular savings		2			(3	)		5
Time Deposits		71			30			41
FHLB borrowings		(29	)		11			(40	)
Subordinated notes		134			—			134
Other borrowings		(3	)		4			(7	)
Total interest expense		174			35			139
Net interest income	$	160		$	(176	)	$	336

A provision for loan losses of $808 thousand was recorded for the three months ended June 30, 2016; $60 thousand was recorded in the first quarter of 2016 compared to none in any quarter of the prior year. The previously mentioned $606 thousand partial charge off of one loan and the continuing growth of the loan portfolio precipitated the recordation of a provision in the current year. See discussion under Allowance for Loan Losses for additional information.

Noninterest income for the second quarter of 2016 was $873 thousand, and was $178 thousand more than the same period last year. Service charges on deposit accounts, and ATM and interchange income were up $62 thousand for 2016 compared to 2015 due to deposit growth and changes late in the third quarter of 2015 in the fee structure to be more in line with industry norms. Mortgage banking income was $77 thousand less than the prior year due to a lower volume of mortgages processed and sold. The second quarter of 2016 included $209 thousand in gains realized from the sales of investment securities compared to none in the second quarter of 2015. Volatility created by the Breixit referendum led to a surge in trading activity creating opportunities to realize gains in the bond markets. Proceeds were reinvested in higher yielding corporate bonds. Other income was $16 thousand lower for the quarter ended June 30, 2016 compared to the same quarter last year. Favorable variances from the continued growth of merchant processing income by $15 thousand over the prior year were offset by the loss of $35 thousand in rental income from the sale of a building adjacent to a branch for a gain in the last quarter of 2015.

For the three months ended June 30, 2016, noninterest expense was $3.4 million, $143 thousand or 4.4% more than the $3.2 million recorded in the same quarter last year. Salaries and employee benefits for the three months ended June 30, 2016 were $22 thousand or 1.4% less than the same three months of 2015. For the quarter to quarter comparison, the amount of Accounting Standards Codification (ASC) 310-20 origination costs that were deferred was greater in 2016 than 2015 due to a higher volume of new loans and renewals. Another factor contributing to lower salaries and employee benefits expense was the partial reversal of the bonus accrual as a result of year to date earnings falling below budget in the second quarter of 2016. Advertising and marketing expense for the second quarter of 2016 varied favorably with the prior year. Efforts were accelerated in the first part of 2015 to take advantage of competitive opportunities in the local banking market created by the acquisition of Valley Bank by a North Carolina headquartered financial institution. HomeTown Bank is now the largest community bank headquartered in the Roanoke Valley. Bank Franchise Tax was $26 thousand more for the second quarter of 2016 than the same quarter last year. The increase in the Bank’s equity from retained earnings, the capital infusion of $6.0 million from the proceeds of the subordinated notes issued at the end of 2015, and the reduction in real estate taxes paid on foreclosed properties which are deducted from capital on the Bank Franchise return, were all factors contributing to the increase in the Bank Franchise Tax in 2016. A loss of $91 thousand was realized from the sale of a $1.3 million property that the bank had carried in other real estate owned since receiving the deed in lieu of foreclosure in September 2014. The Board of Directors fees were raised in 2016 in recognition of the Company’s growth in asset size.

Six months Ended June 30, 2016

Net income attributable to HomeTown Bankshares for the year through June 30, 2016 was $1.0 million, $614 thousand less than the earnings for the same period in 2015. As previously discussed the increased provision for loan losses to replenish the allowance for loan losses for the partial charge off of one loan and the write off deferred tax assets related to the expiration of nonqualified stock options were the major contributors to lower earnings in the current year. Net interest income and noninterest income varied favorably from the prior year, and were partially negated by higher noninterest expense.

Net interest income was up $329 thousand or 4.4% to $7.8 million for the first half of 2016 over the first half of 2015. Higher loan volume helped to offset lower interest rates on loans and increased sub-debt interest expense for the first half of 2016; however, as anticipated, the cost of the $7.5 million capital raise in December 2015, had a near-term impact on earnings and the net interest margin while the continued growth in interest income from new loans and investments surpassed the interest expense incurred. Accordingly, a year-over year decline of 23 basis points in the net interest margin was realized from 3.82% for the first half of 2015 compared to 3.59% for the first half of 2016.

	For the Six Months Ended June 30, 2016								For the Six Months Ended June 30, 2015
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	1,481		$	3		0.38	%	$	1,085		$	1		0.14	%
Deposits in banks		9,656			42		0.88			5,456			17		0.62
Securities, taxable		38,067			405		2.13			36,367			382		2.11
Securities, nontaxable (1)		14,947			202		4.09			14,684			203		4.20
Restricted equity securities		2,579			70		5.45			2,726			68		5.02
Loans held for sale		420			8		3.84			505			10		4.00
Loans (1)		378,210			8,585		4.57			341,113			7,936		4.69
Total earnings assets		445,360			9,315		4.25			401,936			8,617		4.37
Less: Allowance for loan losses		(3,348	)							(3,327	)
Total non-earning assets		49,317								40,847
Total Assets	$	491,329							$	439,456

Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	75,778		$	53		0.14	%	$	81,223		$	64		0.16	%
Money market savings		70,512			84		0.24			61,152			82		0.27
Regular savings		40,347			74		0.37			34,969			71		0.41
Time Deposits		143,849			830		1.16			136,863			696		1.02
FHLB borrowings		19,524			155		1.57			25,632			183		1.42
Subordinated notes		7,200			268		7.36			—			—		—
Other borrowings		1,380			12		1.76			1,347			11		1.60
Total interest bearing liabilities		358,590			1,476		0.82			341,186			1,107		0.65
Non-interest bearing liabilities:
Demand deposits		83,341								52,286
Other liabilities		2,011								1,733
Total liabilities		443,942								395,205
Total HomeTown Bankshares Corporation stockholders’ equity		47,004								44,076
Non-controlling interest in consolidated subsidiary		383			—					175			—
Total Liabilities and Stockholders’ Equity	$	491,329			1,476				$	439,456			1,107
Net interest income				$	7,839							$	7,510
Interest rate spread							3.43								3.72
Interest expense to average earning assets							0.66								0.55
Net interest margin							3.59	%							3.82	%

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

	Six months Ended June 30, 2016 Compared to Six months Ended June 30, 2015

	Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	2		$	2		$	—
Deposits in banks		25			8			17
Securities, taxable		23			4			19
Securities, nontaxable		(1	)		(7	)		6
Restricted equity securities		2			6			(4	)
Loans held for sale		(2	)		—			(2	)
Loans		649			(159	)		808
Total interest income		698			(146	)		844

Interest expense:
Interest bearing liabilities:
Checking		(11	)		(7	)		(4	)
Money market savings		2			(10	)		12
Regular savings		3			(7	)		10
Time Deposits		134			64			70
FHLB borrowings		(28	)		19			(47	)
Subordinated notes		268			—			268
Other borrowings		1			2			(1	)
Total interest expense		369			61			308
Net interest income	$	329		$	(207	)	$	536

The year to date provision for loan losses totaled $868 thousand for the six months ended June 30, 2016 compared to none for the same period in 2015. See discussion under Allowance for Loan Losses for additional information.

For the year to date through June 30, 2016, noninterest income totaled $1.5 million, an increase of $254 thousand or 20.7% over the same period last year. Excluding gains on the sales of securities, noninterest income increased $80 thousand or 6.7% from the same period last year. Service charges on deposit accounts, and ATM and interchange income were up $131 thousand for the first half of 2016 compared to 2015 due to deposit growth and changes late in the third quarter last year in the fee structure to be more in line with industry norms. Other income was $29 thousand lower for the six months ended June 30, 2016 compared to the same period last year. Favorable variances from the continued growth of merchant processing income, investment brokerage commission fees, and loan fees, were offset by the loss of $94 thousand in rental income from the sale of a building adjacent to a branch for a gain in the last quarter of 2015.

For the six months ended June 30, 2016, noninterest expense was $6.6 million, $296 thousand or 4.7% more than the $6.3 million recorded in the first half of last year. Salaries and employee benefits for the first half of 2016 were $163 thousand or 5.2% more than the same period last year. The numbers of full time equivalent employees were 99 and 92 at June 30, 2016 and June 30, 2015, respectively. The increase was due to several factors including the addition of Private Wealth which contributed to loan and deposit growth during the first half of the year 2016. Other factors included unfilled open positions in the prior year, and new positions to accommodate growth, as well as annual merit raises. Higher wages were partially offset by the deferral of more loan origination costs, in accordance with ASC 310-20. Advertising and marketing expense for the first half of 2016 varied favorably with the prior year. As discussed in the quarter to quarter comparison, the marketing effort was more intense in 2015 in the wake of Valley Bank’s acquisition by a North Carolina financial institution. As discussed in the quarter to quarter comparison, higher Bank Franchise Tax, Board of Directors fees and the loss on the sale of other real estate owned also contributed to higher noninterest expense. Bank Franchise Taxes were up in correlation with increased equity and a reduction in real estate taxes on foreclosed properties.

Financial Condition

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

At June 30, 3016 the Company’s total assets passed the half million threshold and totaled $505 million, an increase of $26.0 million or 5.4% since year end 2015. The continuing expansion of the loan portfolio by $26.2 million during the six months since December 31, 2015, accounted for most of the asset growth. The investments in securities available for sale increased $2.0 million since year end 2015 to $54.5 million at June 30, 2016.

The Company’s liabilities at June 30, 2016 totaled $458 million compared to $433 million at December 31, 2015, an increase of $25.0 million or 5.8%. Deposits rose $33.7 million during the same period to $433 million at June 30, 2016 due to core deposit growth. Interest-bearing deposits accounted for $27.6 million of the total increase in deposits.

At June 30, 2016 and December 31, 2015, the stockholders’ equity of HomeTown Bankshares was $47.0 million and $46.0 million, respectively, an increase of $1.0 million or 2.2%. The change in stockholders’ equity in the first six months of 2016 was mainly the result of net income.

Non-performing Assets

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

(Dollars in thousands)	June 30, 2016		December 31, 2015
Real Estate:
Construction and land development	$	8	$	11
Residential 1-4 families		577		—
Commercial real estate		1,652		368
Commercial loans		11		47
Equity lines		—		—
Loans to individuals		—		—
Total nonperforming loans		2,248		426
Other real estate owned		4,337		5,237
Total nonperforming assets, excluding performing restructured loans		6,585		5,663
Performing restructured loans		6,315		6,398
Total nonperforming assets, including restructured loans	$	12,900	$	12,061

During the six months ended June 30, 2016 the Bank sold $1.4 million of foreclosed properties. One property on the books at $1.3 million was sold for a loss of $91 thousand after being held by the bank for almost two years. During the first half of 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. No gains or losses on sales of other real estate or writedowns were recorded in the first six months of 2015.

Two loans were added to nonaccrual in the second quarter of 2016. One of these loans was collateralized by a hotel. The loan with an outstanding balance of $1.9 million, was partially charged down $606 thousand to $1.3 million and placed on nonaccrual. The sale of the underlying collateral was completed in August 2016 and the proceeds paid off the $1.3 million nonaccrual balance. Another loan with a balance of $577 thousand was also placed on nonaccrual status, when the number of days past due exceeded 90 days. Two of the borrowers with nonaccrual loans comprising $365 thousand were making payments and were not past due at the end of the quarter; however, they are remaining on nonaccrual until performance warrants return to accrual status.

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.6 million at June 30, 2016. Four of the six loans totaling $6.3 million were accruing interest at the end of the second quarter. One of these loans in the amount of $564 thousand was 46 days past due on June 30, 2016, and subsequently made a payment reducing the number of days past due to 16 at the end of July. The three other accruing loans and two nonaccrual loans were performing in accordance with their restructured terms at June 30, 2016. For the six months ended June 30, 2016, no loans were modified in a TDR compared to one loan modified into two restructured loans for the same period in 2015. See Note 3 for more information.

The major classifications of other real estate owned in the consolidated balance sheets at June 30, 2016 and December 31, 2015 are included in Note 5, and the activity in other real estate owned for the first six months of 2016 and 2015 is also included in Note 5.

Allowance for Loan Losses

The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. The allowance consists of three components: specific, general, and unallocated. Their adequacy is evaluated separately. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Based on the Company’s allowance for loan losses calculation and analysis at the end of the first six months of 2016, a provision of $868 thousand was recorded. As alluded to throughout this document, one loan that originated in 2008 and had performed as agreed until the second quarter of 2016 was partially charged off in the amount of $606 thousand. Total net charge offs for the year through June 30, 2016 were $717 thousand. The increase in net charge offs was the main reason behind the higher provision for loan losses in the second quarter of 2016. Loan growth also contributed to the need for a provision in 2016.

Specific reserves are determined on a loan by loan basis and relate to loans classified as impaired. Management classifies loans as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Included in potentially impaired loan category are current “watch list” credits plus any additional credits which have been past due three or more times within the past 12-month period. Management individually reviews these potentially impaired loans based on generally accepted accounting principles (GAAP) related to receivables and makes a determination if the loan in fact is impaired. Management does not consider a loan impaired during a period of delay in payment if management expects the ultimate collection of all amounts due. If a loan is found to be impaired, an allowance is established when the collateral value less estimated cost to dispose, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. Specific reserves for loans individually evaluated for impairment totaled $17 thousand at June 30, 2016 and December 31, 2015. Impaired loans totaled $9.6 million at June 30, 2016, and were $1.8 million more than the balance at year end 2015. Impaired loans at June 30, 2016 included the two loans placed on nonaccrual status during the second quarter of 2016.

The percentage of the allowance for loan losses to total loans was 0.88% and 0.90% at June 30, 2016, and December 31, 2015, respectively. Unallocated reserves were $19 thousand at June 30, 2016 and $87 thousand at December 31, 2015. Some surplus or unallocated reserve is desirable given the inherent weakness in this type of predictive analysis. The major indicators of loan quality declined as a result of the two additional nonaccrual loans. Net charges offs as a percent of average loans were 0.38% through June 30, 2016. Nonperforming loans were 0.57% and 0.12% of total loans at June 30, 2016 and December 31, 2015, respectively. The allowance for loan losses to nonaccrual loans was over 153.4% at June 30, 2016 and 775% at December 31, 2015.

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate

withdrawals, payments of debt, and increased loan demand. Liquid assets include cash, federal funds sold, securities classified as available for sale as well as loans and securities maturing within one year. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

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

The Company’s asset based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $74.5 million at June 30, 2016, compared to $73.0 million at December 31, 2015, and $53.3 million at June 30, 2015. The changes in the level of liquidity over the prior 12 month period reflect the depletion of available liquid funds to expand the loan portfolio in the first half of 2015. Higher levels of commercial noninterest bearing deposits contributed to higher levels of liquidity since mid-2015, peaking at the end of the third quarter 2015. Commercial deposits are by their nature highly volatile, and withdrawals may result in less liquidity in the future. To provide a more stable source of liquidity, at the end of the fourth quarter 2015, the Company issued $7.5 million in subordinated notes. 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. Commercial noninterest bearing deposits were $5.8 million higher at June 30, 2016 than at December 31, 2015, and $18.3 million higher than one year ago.

The Company’s primary source of funding is its retail deposit base. The Company aggressively markets in its trade area and seeks demand deposits through service-related tactics and savings deposits through competitive pricing tactics. If this funding source is not attractive either for reasons of maturity or pricing, alternative funding sources include Federal Home Loan Bank (FHLB) advances, brokered deposits, fed funds purchased and guidance lines of credit. The Company is approved to borrow 20% of total assets from the FHLB subject to providing qualifying collateral. At June 30, 2016, the Company had borrowed $14.7 million of the $28.8 million of lendable collateral value, leaving $14.1 million of unused credit immediately available. The Company also had 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 $21.5 million of fed funds lines of credit available at June 30, 2016. At the end of the second quarter of 2016, there were no advances on the fed funds or guidance lines.

Capital

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 June 30, 2016 and December 31, 2015, the Company had stockholders’ equity of $47.4 million and $46.4 million, respectively, an increase of $1.0 million or 2.3%. The 4% common stock dividend declared by the Board of Directors on May 10, 2016 to holders of record June 9, 2016 was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177 to a total of 5,763,944 on July 11, 2016. The stock dividend shifted $1.3 million from retained earnings to common stock distributable and surplus in June 2016.

The remaining preferred shares were converted to common stock in June, 2016 eliminating the dividend of 6% per year in future quarters. Each share of Series C preferred stock converted into 166.4 shares of common stock, which was comprised of the conversion factor of 160 plus the benefit of the 4% stock dividend of 6.4 additional shares.

The ability to pay cash 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 cash dividends to common stockholders would be prudent relative to the organization’s financial position and not based on overly optimistic earnings scenarios. The Company had $247 thousand retained deficit at June 30, 2016. No cash dividends were paid to common stockholders in the first six months of 2016.

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.

The table presents the Bank’s capital amounts and ratios calculated using the Basel III rules in effect at June 30, 2016 and December 31, 2015.

Risk Based Capital Analysis

Capital Analysis

HomeTown Bank
(Dollars in thousands)	June 30, 2016		December 31, 2015
Common Equity Tier 1 Capital:
Common Stock	$	14,697	$	14,697
Surplus		32,005		31,930
Retained Earnings		6,210		4,929
Common Equity Tier 1 Capital		52,912		51,556
Tier 1 Capital:
Tier 1 Minority Interest		20		36
Tier 1 Capital		52,932		51,592
Total Capital:
Allowance for Loan Losses (allowable portion)		3,449		3,298
Total Capital	$	56,381	$	54,890

The Bank’s total capital increased $1.5 million from December 31, 2015 to June 30, 2016, primarily as the result of retaining the $1.3 million of the year to date June 30, 2016 net income.

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. In July 2013, the Federal Reserve Bank issued revised final rules that made technical changes to its market risk capital rules to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final new capital rules required the Bank to comply with the following new minimum capital ratios, effective January 1, 2015: (1) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the previous requirement of 4%); (3) a total capital ratio of 8% of risk-weighted assets (unchanged from current requirement); and, (4) a leverage ratio of 4% of total assets. Beginning January 1, 2016, a capital conservation buffer of .625% became effective. The capital conservation buffer will be gradually increased through January 1, 2019 to 2.5%. Banks will be required to maintain capital levels that meet the required minimum plus the capital conservation buffer in order to make distributions or discretionary bonus payments.

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

HomeTown Bank June 30, 2016	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)	$	56,381		13.02	%	$	34,654		8.00	%	$	43,317		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)	$	52,912		12.22	%	$	19,493		4.50	%	$	28,156		6.50	%
Tier I Capital (to Risk-Weighted Assets)	$	52,932		12.22	%	$	25,990		6.00	%	$	34,654		8.00	%
Tier I Leverage (to Average Assets)	$	52,932		10.61	%	$	19,955		4.00	%	$	24,944		5.00	%

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	%

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance-sheet risk. These financial instruments involve commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for on-balance-sheet risk.

At June 30, 2016 outstanding commitments to extend credit including letters of credit were $98.4 million. There are no commitments to extend credit on impaired loans.

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

Recent Accounting Pronouncements

In June 2014, the FASB issued ASU No. 2014-12, “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 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.

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company elected early adoption of ASU 2016-09 in the second quarter of 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

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

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. Charles W. Maness, Jr. retired from the Company effective August 5, 2016. Mr. Maness had served as the Company’s Chief Financial Officer and Principal Accounting Officer since May 1, 2006 and is retiring in order to travel and spend more time with his family. Vance W. Adkins, who joined the Company in 2010 as the Senior Risk Officer, has been promoted by the Board of Directors to serve as the Company’s Chief Financial Officer and Principal Accounting Officer effective as of Mr. Maness’s retirement. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Not applicable to smaller reporting companies.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

(a) Exhibits

Exhibit No.
31.1		Certification of Chief Executive of Officer (302 Certification).

31.2		Certification of Chief Financial Officer (302 Certification).

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

101*		Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2016, and December 31, 2015; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016, and 2015; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015; and (v) Notes to Consolidated Financial Statements.

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

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOMETOWN BANK

Date: August 15, 2016	By:	/S/ SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer

Date: August 15, 2016	By:	/S/ VANCE W. ADKINS
		Vance W. Adkins
		Executive Vice President
		Chief Financial Officer

HOMETOWN BANK

FORM 10Q

INDEX TO EXHIBITS

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

31.2		Certification of Chief Financial Officer (302 Certification).

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

101*

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2016, and December 31, 2015; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016, and 2015; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015; and (v) Notes to Consolidated Financial Statements.

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

HomeTown Bankshares Corp - FORM 10-Q - August 15, 2016

Attached files

HomeTown Bankshares Corp Reports