UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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(Mark One)

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

for the quarterly period ended September 30, 2017. 

Or 

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

 

for the transition period from              to             .

 

Commission File Number: 333-158525

 

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 HOMETOWN BANKSHARES CORPORATION

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

 

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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)

 

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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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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	☒
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

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

 

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

 

As of November 13, 2017, 5,776,175 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

 

 

 HOMETOWN BANKSHARES CORPORATION

Form 10-Q

 

INDEX

PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016		3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)		4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)		5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
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

September 30, 2017 and December 31, 2016

 

Dollars in Thousands, Except Share and Per Share Data		September 30, 2017				December 31, 2016
		(Unaudited)					*
Assets
Cash and due from banks		$	34,755			$	18,229
Federal funds sold			132				42
Securities available for sale, at fair value			53,594				52,975
Restricted equity securities, at cost			2,371				2,213
Loans held for sale			1,013				678
Loans, net of allowance for loan losses of $3,706 in 2017 and $3,636 in 2016			431,104				415,355
Property and equipment, net			13,098				13,371
Other real estate owned, net of valuation allowance of $589 in 2017 and $825 in 2016			3,562				3,794
Bank owned life insurance			8,115				7,469
Accrued income			2,619				2,289
Other assets			1,084				875
Total assets		$	551,447			$	517,290
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing		$	110,249			$	91,354
Interest-bearing			368,695				359,494
Total deposits			478,944				450,848
Federal Home Loan Bank borrowings			11,361				8,000
Subordinated notes			7,247				7,224
Other borrowings			992				1,117
Accrued interest payable			508				386
Other liabilities			1,717				1,490
Total liabilities			500,769				469,065
Commitments and contingencies
Stockholders’ equity:
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 5,771,175 (includes 28,679 restricted shares) at September 30, 2017 and 5,760,735 (includes 31,546 restricted shares) at December 31, 2016			28,776				28,765
Surplus			17,942				17,833
Retained earnings			3,363				1,247
Accumulated other comprehensive income (loss)			107				(56	)
Total HomeTown Bankshares Corporation stockholders’ equity			50,188				47,789
Noncontrolling interest in consolidated subsidiary			490				436
Total stockholders’ equity			50,678				48,225
Total liabilities and stockholders' equity		$	551,447			$	517,290

 

*Derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

 

 

 

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
Dollars in Thousands, Except Share and Per Share Data		2017				2016				2017				2016
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Interest and dividend income:
Loans and fees on loans		$	4,797			$	4,523			$	14,123			$	13,116
Taxable investment securities			244				209				744				614
Nontaxable investment securities			75				93				239				295
Dividends on restricted stock			33				31				98				101
Other interest income			68				34				160				79
Total interest and dividend income			5,217				4,890				15,364				14,205
Interest expense:
Deposits			588				588				1,694				1,629
Subordinated notes			134				134				402				402
Other borrowed funds			58				54				171				221
Total interest expense			780				776				2,267				2,252
Net interest income			4,437				4,114				13,097				11,953
Provision for loan losses			40				111				575				979
Net interest income after provision for loan losses			4,397				4,003				12,522				10,974
Noninterest income:
Service charges on deposit accounts			120				178				415				496
ATM and interchange income			206				176				612				491
Mortgage banking			263				251				725				607
Gains on sales of investment securities, net			18				43				60				257
Other income			150				187				675				468
Total noninterest income			757				835				2,487				2,319
Noninterest expense:
Salaries and employee benefits			2,099				1,772				6,153				5,095
Occupancy and equipment expense			391				439				1,245				1,317
Data processing expense			309				237				954				679
ATM processing expense			57				60				180				172
Advertising and marketing expense			112				127				383				345
Professional fees			89				135				454				352
Bank franchise taxes			100				92				299				275
FDIC insurance expense			78				89				181				247
Losses on sales and write-downs of other real estate owned, net			-				-				380				91
Other real estate owned expense			28				25				66				72
Directors’ fees			97				98				306				307
Other expense			444				412				1,308				1,161
Total noninterest expense			3,804				3,486				11,909				10,113
Net income before income taxes			1,350				1,352				3,100				3,180
Income tax expense			413				416				930				1,203
Net income			937				936				2,170				1,977
Less net income attributable to non-controlling interest			20				33				54				49
Net income attributable to HomeTown Bankshares Corporation			917				903				2,116				1,928
Effective dividends on preferred stock			-				-				-				408
Net income available to common stockholders		$	917			$	903			$	2,116			$	1,520
Basic earnings per common share		$	0.16			$	0.16			$	0.37			$	0.36
Diluted earnings per common share		$	0.16			$	0.16			$	0.37			$	0.26
Weighted average common shares outstanding			5,770,175				5,763,944				5,767,602				4,279,821
Diluted weighted average common shares outstanding			5,794,777				5,774,086				5,792,204				5,776,632

 

See Notes to Consolidated Financial Statements

 

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Dollars In Thousands		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income		$	937			$	936			$	2,170			$	1,977
Other comprehensive income (loss):
Net unrealized holding gains (losses) on securities available for sale during the period			(201	)			(149	)			307				583
Deferred income tax benefit (expense) on unrealized holding gains (losses) on securities available for sale			68				50				(104	)			(198	)
Reclassification adjustment for gains on sales of investment securities included in net income			(18	)			(43	)			(60	)			(257	)
Tax expense related to realized gains on securities sold			6				15				20				87
Total other comprehensive income (loss)			(145	)			(127	)			163				215
Comprehensive income			792				809				2,333				2,192
Less: Comprehensive income attributable to the non-controlling interest			20				33				54				49
Comprehensive income attributable to HomeTown Bankshares Corporation		$	772			$	776			$	2,279			$	2,143

 

See Notes to Consolidated Financial Statements

 

 

 

		For the Nine Months Ended September 30,
Dollars in Thousands		2017				2016
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income		$	2,170			$	1,977
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			545				568
Provision for loan losses			575				979
Amortization of premium on securities, net			351				448
Amortization of discount on subordinated notes			23				23
Gains on sales of loans held for sale			(516	)			(435	)
Losses on sales and write-downs of other real estate, net			380				91
Gains on sales of investment securities, net			(60	)			(257	)
Increase in value of life insurance contracts			(146	)			(133	)
Stock compensation expense			109				111
Originations of loans held for sale			(24,759	)			(17,443	)
Proceeds from sales of loans held for sale			24,940				19,227
Changes in assets and liabilities:
Accrued income			(330	)			(19	)
Other assets			(222	)			(199	)
Deferred taxes, net			(71	)			163
Accrued interest payable			122				226
Other liabilities			227				(300	)
Net cash flows provided by operating activities			3,338				5,027
Cash flows from investing activities:
Net (increase) decrease in federal funds sold			(90	)			296
Purchases of available for sale securities			(18,099	)			(14,087	)
Sales, maturities, and calls of available for sale securities			17,436				12,682
(Purchase) redemption of restricted equity securities, net			(158	)			322
Net increase in loans			(17,074	)			(37,771	)
Purchase of other real estate at foreclosure			(274	)			-
Proceeds from sales of other real estate			876				1,353
Purchases of bank owned life insurance			(500	)			(1,000	)
Purchases of property and equipment			(272	)			(103	)
Net cash flows used in investing activities			(18,155	)			(38,308	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits			18,895				11,448
Net increase in interest-bearing deposits			9,201				29,000
Net increase (decrease) in FHLB borrowings			3,361				(13,000	)
Net increase (decrease) in other borrowings			(125	)			(1,235	)
Proceeds from exercise of stock options			28				–
Preferred stock dividend payment			–				(408	)
Net settlement restricted stock and cash in lieu of fractional shares			(17	)			(5	)
Net cash flows provided by financing activities			31,343				25,800
Net increase (decrease) in cash and cash equivalents16,526			16,526				(7,481	)
Cash and cash equivalents, beginning			18,229				28,745
Cash and cash equivalents, ending		$	34,755			$	21,264
Supplemental disclosure of cash flow information:
Cash payments for interest		$	2,122			$	2,026
Cash payments for income taxes		$	1,211			$	1,253
Supplemental disclosure of noncash investing activities:
Change in unrealized gains (losses) on available for sale securities		$	247			$	326
Transfer from loans to other real estate		$	750			$	481
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 September 30, 2017 and for the periods ended September 30, 2017 and 2016 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 periods ended September 30, 2017 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, 2016, included in the Company’s Form 10-K for the year ended December 31, 2016. 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’s 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 September 30, 2017 and December 31, 2016, are as follows:

 

(Dollars In Thousands)		September 30, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U. S. Government agency securities		$	13,327			$	91			$	(62	)		$	13,356
Mortgage-backed securities and CMO’s			21,322				35				(164	)			21,193
Corporate securities			6,490				89				(21	)			6,558
Municipal securities			12,293				284				(90	)			12,487
		$	53,432			$	499			$	(337	)		$	53,594

 

 

(Dollars In Thousands)		December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U. S. Government agency securities		$	12,422			$	118			$	(96	)		$	12,444
Mortgage-backed securities and CMO’s			19,979				54				(265	)			19,768
Corporate securities			5,000				66				-				5,066
Municipal securities			15,659				266				(228	)			15,697
		$	53,060			$	504			$	(589	)		$	52,975

 

U. S. Government agency securities: The unrealized losses on fifteen of the Company’s investments in obligations of the U. S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments before recovery of their amortized cost basis which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017.

 

Mortgage-backed securities and CMO’s: The unrealized losses on twenty-two 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017.

 

Corporate securities: The unrealized loss on three of the Company’s investments in corporate securities was caused by increases in market interest rates over the yield at the time the security was purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2017.

 

Municipal securities: The unrealized losses on seven 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 basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017.

 

The following tables demonstrate the unrealized loss position of available-for-sale securities at September 30, 2017 and December 31, 2016. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

  

		September 30, 2017
		Less than 12 months								12 months or more								Total
(Dollars In Thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U. S. Government agency securities		$	4,513			$	(36	)		$	1,984			$	(26	)		$	6,497			$	(62	)
Mortgage-backed securities and CMO’s			9,394				(73	)			4,404				(91	)			13,798				(164	)
Corporate securities			2,469				(21	)			-				-				2,469				(21	)
Municipal securities			1,250				(9	)			2,322				(81	)			3,572				(90	)
		$	17,626			$	(139	)		$	8,710			$	(198	)		$	26,336			$	(337	)

 

		December 31, 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		$	3,492			$	(32	)		$	3,491			$	(64	)		$	6,983			$	(96	)
Mortgage-backed securities and CMO’s			14,232				(235	)			1,474				(30	)			15,706				(265	)
Corporate securities			500				-				-				-				500				-
Municipal securities			6,967				(223	)			262				(5	)			7,229				(228	)
		$	25,191			$	(490	)		$	5,227			$	(99	)		$	30,418			$	(589	)

 

 

There are forty-seven debt securities with fair values totaling $26.3 million considered temporarily impaired at September 30, 2017.  As of September 30, 2017, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

 

The Company realized gains of $165 thousand and $105 thousand of losses on sales of securities in the first nine months of 2017. The Company realized gains of $262 thousand and $5 thousand of losses during the same period last year.

 

The amortized cost and fair values of investment securities available for sale at September 30, 2017, by contractual maturity are as follows:

 

(Dollars In Thousands)		Amortized Cost				Fair Value
One year or less		$	246			$	247
Over one through five years			3,153				3,147
Over five through ten years			14,651				14,807
Greater than 10 years			35,382				35,393
		$	53,432			$	53,594

 

Note 3. Loans Receivable

 

The major classifications of loans in the consolidated balance sheets at September 30, 2017 and December 31, 2016 were as follows:

 

(Dollars In Thousands)		September 30, 2017				December 31, 2016
Construction loans:
Residential		$	12,278			$	10,204
Land acquisition, development & commercial			33,915				27,480
Real estate:
Residential			117,114				111,626
Commercial			173,713				172,248
Commercial, industrial & agricultural			61,070				59,702
Equity lines			28,914				29,956
Consumer			7,724				7,668
Overdrafts			82				107
Total			434,810				418,991
Less allowance for loan losses			(3,706	)			(3,636	)
Loans, net		$	431,104			$	415,355

  

The past due and nonaccrual status of loans as of September 30, 2017 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		$	173			$	−			$	−			$	173			$	12,105			$	12,278			$	−
Land acquisition, development & commercial			172				95				32				299				33,616				33,915				−
Real estate:
Residential			578				648				144				1,370				115,744				117,114				459
Commercial			364				−				530				894				172,819				173,713				211
Commercial, industrial & agricultural			496				23				100				619				60,533				61,152				27
Equity lines			93				−				204				297				28,617				28,914				−
Consumer			7				40				14				61				7,663				7,724				3
Total		$	1,883			$	806			$	1,024			$	3,713			$	431,097			$	434,810			$	700

 

 

The past-due and nonaccrual status of loans as of December 31, 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:
Residential		$	−			$	−			$	−			$	−			$	10,204			$	10,204			$	−
Land acquisition, development & commercial			−				−				−				−				27,480				27,480				−
Real Estate:
Residential			672				193				577				1,442				110,184				111,626				577
Commercial			115				−				−				115				172,133				172,248				336
Commercial, industrial & agricultural			60				33				−				93				59,716				59,809				11
Equity lines			258				−				−				258				29,698				29,956				−
Consumer			8				6				4				18				7,650				7,668				−
Total		$	1,113			$	232			$	581			$	1,926			$	417,065			$	418,991			$	924

 

There were eight credits and three credit card accounts totaling $1.0 million, which were past due ninety days or more as of September 30, 2017. Of that total, two credits totaling $19 thousand were on nonaccrual status. There were two loans, totaling $4 thousand, which were past due ninety days or more and still accruing interest at December 31, 2016.

 

Impaired loans, which include TDR’s of $4.2 million, and the related allowance at September 30, 2017, were as follows:

 

September 30, 2017 With no related allowance: (Dollars In Thousands)

Recorded Investment in Loans

Unpaid Principal Balance

Related Allowance

Average Balance Total Loans

Interest Income Recognized

Construction loans:

Residential

$

−

$

−

$

−

$

−

$

−

Land acquisition, development & commercial

−

−

−

−

−

Real estate:

Residential

648

648

−

652

14

Commercial

4,141

4,317

−

4,172

121

Commercial, industrial & agricultural

27

27

−

28

−

Equity lines

−

−

−

−

−

Consumer

−

−

−

−

−

Total loans with no allowance

$

4,816

$

4,992

$

−

$

4,852

$

135

  

September 30, 2017 With an allowance recorded: (Dollars In Thousands)

Recorded Investment in Loans

Unpaid Principal Balance

Related Allowance

Average Balance Total Loans

Interest Income Recognized

Construction loans:

Residential

$

−

$

−

$

−

$

−

$

−

Land acquisition, development & commercial

−

−

−

−

−

Real estate:

Residential

−

−

−

−

−

Commercial

−

−

−

−

−

Commercial, industrial & agricultural

−

−

−

−

−

Equity lines

−

−

−

−

−

Consumer

−

−

−

−

−

Total loans with an allowance

$

−

$

−

$

−

$

−

$

−

  

 

  Impaired loans, which include TDRs of $6.4 million, and the related allowance at December 31, 2016, were as follows:

 

December 31, 2016 With no related allowance: (Dollars In Thousands)

Recorded Investment in Loans

Unpaid Principal Balance

Related Allowance

Average Balance Total Loans

Interest Income Recognized

Construction:

Residential

$

−

$

−

$

–

$

−

$

−

Land acquisition, development & commercial

−

−

–

−

−

Real Estate:

Residential

770

770

–

629

(11

)

Commercial

6,380

6,556

–

6,521

255

Commercial, industrial & agricultural

11

11

–

11

−

Equity lines

−

−

–

−

−

Consumer

−

−

–

−

−

Total loans with no allowance

$

7,161

$

7,337

$

–

$

7,161

$

244

 

December 31, 2016 With an allowance recorded: (Dollars In Thousands)

Recorded Investment in Loans

Unpaid Principal Balance

Related Allowance

Average Balance Total Loans

Interest Income Recognized

Construction:

Residential

$

−

$

−

$

−

$

−

$

−

Land acquisition, development & commercial

−

−

−

−

−

Real Estate:

Residential

−

−

−

−

−

Commercial

115

115

17

122

−

Commercial, industrial & agricultural

−

−

−

−

−

Equity lines

−

−

−

−

−

Consumer

−

−

−

−

−

Total loans with an allowance

$

115

$

115

$

17

$

122

$

−

 

Troubled Debt Restructurings

 

Troubled debt restructurings (“TDR’s”) were comprised of five loans totaling $4.2 million at September 30, 2017.  This compares with $6.4 million in total restructured loans at December 31, 2016. Two of the five loans totaling $3.9 million were accruing at September 30, 2017. The other three loans totaling $238 thousand were on nonaccrual status at the end of the third quarter of 2017.  Three TDRs totaling $757 thousand were past due with their restructured terms at September 30, 2017.

 

The following table presents by class of loan, information related to the loan modified in a TDR during 2017:

 

(Dollars in Thousands)		Loans modified as TDR's For the nine months ended September 30, 2017
Class of Loan		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
Construction loans:
Residential			—			$	—			$	—
Land acquisition, development & commercial			—				—				—
Real estate loans:
Residential			—				—				—
Commercial			1				218				218
Commercial, industrial, agricultural			—				11				29
Equity lines			—				—				—
Consumer			—				—				—
Total Loans			1			$	229			$	247

 

The loan relationship identified above in the table was originally restructured into two TDR’s during 2015 and was included in substandard nonaccrual loans and impaired loans at the end of 2016. There was an additional $18 thousand added to the TDR relationship during the first quarter of 2017.

 

 

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

 

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 September 30, 2017, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

 

September 30, 2017		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		$	63			$	−			$	−			$	26			$	89			$	−			$	89			$	12,278			$	−			$	12,278
Land acquisition, development & commercial			173				−				−				50				223				−				223				33,915				−				33,915
Real estate:							−
Residential			866				−				−				4				870				−				870				117,114				648				116,466
Commercial			1,516				(436	)			41				565				1,686				−				1,686				173,713				4,141				169,572
Commercial, industrial & agricultural			461				(68	)			−				92				485				−				485				61,152				27				61,125
Equity lines			338				−				−				(93	)			245				−				245				28,914				−				28,914
Consumer			97				(59	)			17				44				99				−				99				7,724				−				7,724
Unallocated			122				−				−				(113	)			9				−				9				−				−				−
Total		$	3,636			$	(563	)		$	58			$	575			$	3,706			$	−			$	3,706			$	434,810			$	4,816			$	429,994

 

 

The following table presents, as of December 31, 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).

 

December 31, 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			$	−			$	−			$	(20	)		$	63			$	−			$	63			$	10,204			$	−			$	10,204
Land acquisition, development & commercial			187				(2	)			−				(12	)			173				−				173				27,480				−				27,480
Real estate:
Residential			1,047				(4	)			45				(222	)			866				−				866				111,626				770				110,856
Commercial			1,001				(606	)			−				1,121				1,516				17				1,499				172,248				6,495				165,753
Commercial, industrial & agricultural			531				(34	)			−				(36	)			461				−				461				59,809				11				59,798
Equity lines			277				(99	)			10				150				338				−				338				29,956				−				29,956
Consumer			85				(103	)			49				66				97				−				97				7,668				−				7,668
Unallocated			87				−				−				35				122				−				122				−				−				−
Total		$	3,298			$	(848	)		$	104			$	1,082			$	3,636			$	17			$	3,619			$	418,991			$	7,276			$	411,715

 

Loans by credit quality indicators as of September 30, 2017 were as follows:

 

(Dollars in Thousands)		Pass				Special Mention				Substandard Accruing				Substandard Nonaccrual				Total
Construction loans:
Residential		$	12,278			$	−			$	−			$	−			$	12,278
Land acquisition, development & commercial			33,915				−				−				−				33,915
Real estate loans:
Residential			116,240				226				189				459				117,114
Commercial			172,818				20				664				211				173,713
Commercial, industrial, agricultural			60,495				106				524				27				61,152
Equity lines			28,914				−				−				−				28,914
Consumer			7,721				−				−				3				7,724
Total Loans		$	432,381			$	352			$	1,377			$	700			$	434,810

 

 

Loans by credit quality indicators as of December 31, 2016 were as follows:

 

(Dollars in Thousands)		Pass				Special Mention				Substandard Accruing				Substandard Nonaccrual				Total
Construction loans:
Residential		$	10,204			$	−			$	−			$	−			$	10,204
Land acquisition, development & commercial			27,480				−				−				−				27,480
Real estate loans:
Residential			110,856				−				193				577				111,626
Commercial			171,369				−				543				336				172,248
Commercial, industrial, agricultural			59,120				78				600				11				59,809
Equity lines			29,956				−				−				−				29,956
Consumer			7,668				−				−				−				7,668
Total Loans		$	416,653			$	78			$	1,336			$	924			$	418,991

 

At September 30, 2017 and December 31, 2016, the Company had no loans classified as Doubtful or Loss.

 

Note 5. Other Real Estate Owned

 

Changes in other real estate owned for the nine months ended September 30, 2017 were as follows:

 

(Dollars in Thousands)		Other Real Estate Owned				Valuation Allowance				Net
Balance at the beginning of the year		$	4,619			$	(825	)		$	3,794
Additions			1,024				—				1,024
Write downs			—				(380	)			(380	)
Sales			(1,492	)			616				(876	)
Balance at quarter end		$	4,151			$	(589	)		$	3,562

 

Changes in other real estate owned for the nine months ended September 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			481				—				481
Write downs			—				—				—
Sales			(1,444	)			—				(1,444	)
Balance at quarter end		$	4,694			$	(420	)		$	4,274

 

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2017 and December 31, 2016 were as follows:

 

(Dollars in Thousands)		September 30, 2017				December 31, 2016
Residential lots		$	1,978			$	2,234
Residential development			22				423
Residential single-family homes			1,024				-
Commercial lots			90				90
Commercial buildings			448				1,047
Total Other Real Estate Owned		$	3,562			$	3,794

 

There were no residential real estate loans in the process of foreclosure at September 30, 2017 or December 31, 2016.

 

Other real estate owned related expenses in the consolidated statements of income for the three and nine months ended September 30, 2017 and September 30, 2016 include:

 

(Dollars In Thousands)		Three months Ended September 30, 2017				Three months Ended September 30, 2016				Nine months Ended September 30, 2017				Nine months Ended September 30, 2016
Net loss on sales		$	—			$	—			$	—			$	91
Provision for unrealized losses			—				—				380				—
Operating expenses			28				25				66				72
Total Other Real Estate Owned		$	28			$	25			$	446			$	163

 

 

Note 6. Stock Based Compensation

 

The Company recorded stock based compensation expense of $109 thousand and $111 thousand for the years to date September 30, 2017 and 2016, respectively.

 

The 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors granted stock options to directors, officers and employees expired in 2016, thus there are no options available for future issuance. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost was measured at the grant date based on the fair value of the award and was and continues to be recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. 

 

The Company used the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards was affected by the price of the Company's stock and a number of financial assumptions and variables. These variables included the risk-free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options.  No stock options were granted during 2017 or 2016. Compensation expense is charged to income ratably over the vesting period and was $53 thousand and $58 thousand for the year to date September 30, 2017 and September 30, 2016, respectively. As of September 30, 2017, there was $158 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 2.25 years.  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 September 30, 2017 is as follows:

 

		Options Outstanding				Weighted Average Exercise Price				Aggregate Intrinsic Value (1)				Weighted Average Contractual Term (years)
Balance at December 31, 2016			201,000			$	7.80
Granted			–				–
Exercised			(4,000	)			6.90
Expired			(5,500	)			10.00
Forfeited			–				–
Balance at September 30, 2017			191,500			$	7.76			$	609,025				6.07
Exercisable at September 30, 2017			99,700			$	8.55			$	246,415				4.91

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2017.

 

In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. 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 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 $56 thousand and $53 thousand for the years to date September 30, 2017 and 2016, respectively. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The Company granted 8,258 and 11,149* shares of restricted stock under the plan during the years to date September 30, 2017 and September 30, 2016, respectively. The weighted-average grant date fair value of restricted stock granted in 2017 was $9.87 compared to $9.09* in 2016.  

 

 

As of September 30, 2017, there was $190 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2022. A summary of the activity for restricted stock awards for the periods indicated is presented below:

 

		For the Nine Months Ended September 30, 2017								For the Nine Months Ended September 30, 2016
		Shares				Weighted- Average Grant Date Fair Value				Shares				Weighted- Average Grant Date Fair Value
Nonvested at beginning of year			31,546			$	7.03				39,352		*	$	6.00	*
Granted			8,258				9.87				11,149		*		9.09	*
Vested			(11,125	)			6.03				(11,371	)	*		5.44	*
Forfeited			-				-				(6,788	)	*		6.99	*
Nonvested at the end of the period			28,679			$	8.23				32,342		*	$	7.06	*

 

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.

 

*Restated for the 4% stock dividend distributed 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 tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

 

(Dollars in Thousands)

Carrying value at September 30, 2017

Description

Balance as of September 30, 2017

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

$

13,356

$

–

$

13,356

$

–

Mortgage-backed securities and CMO’s

21,193

–

21,193

–

Corporate securities

6,558

–

6,558

–

Municipal securities

12,487

–

12,487

–

 

 

(Dollars in Thousands)

Carrying value at December 31, 2016

Description

Balance as of December 31, 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

$

12,444

$

–

$

12,444

$

–

Mortgage-backed securities and CMO’s

19,768

–

19,768

–

Corporate securities

5,066

–

5,066

–

Municipal securities

15,697

–

15,697

–

 

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 less selling costs 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 tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016.

 

(Dollars in Thousands)

Carrying value at September 30, 2017

Description

Balance as of September 30, 2017

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Assets:

Loans held for sale

1,013

–

1,013

–

Other real estate owned

3,562

–

–

3,562

 

 

(Dollars in Thousands)

Carrying value at December 31, 2016

Description

Balance as of December 31, 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

$

98

$

–

$

–

$

98

Loans held for sale

678

–

678

–

Other real estate owned

3,794

–

–

3,794

 

At September 30, 2017 and December 31, 2016, 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 September 30, 2017:

 

(Dollars in Thousands)		Quantitative information about Level 3 Fair Value Measurements for September 30, 2017
Assets		Fair Value			Valuation Technique(s)		Unobservable input		Range (Weighted Average)
Other real estate owned		$	1,378		Discounted appraised value		Selling cost			6%	-	6%	(6%)
							Discount for lack of marketability and age of appraisal			4%	-	13%	(12%)
		$	2,184		Internal evaluations		Internal evaluations			4%	-	95%	(22%)

 

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2016:

 

(Dollars in Thousands)		Quantitative information about Level 3 Fair Value Measurements for December 31, 2016
Assets		Fair Value			Valuation Technique(s)		Unobservable input		Range (Weighted Average)
Impaired loans		$	98		Discounted appraised value		Residual cash flows discount rate			6%	-	6%	(6%)
Other real estate owned		$	1,560		Discounted appraised value		Selling cost			6%	-	6%	(6%)
							Discount for lack of marketability and age of appraisal			4%	-	12%	(10%)
		$	2,234		Internal evaluations		Internal evaluations			4%	-	54%	(24%)

 

 

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.

 

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At September 30, 2017 and December 31, 2016, management believes the carrying value of federal funds sold approximates estimated market value.

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

Subordinated notes: The 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).

 

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 September 30, 2017 and December 31, 2016, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

 

 

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at September 30, 2017:

 

(Dollars in Thousands)						Fair value at September 30, 2017
Description		Carrying value as of September 30, 2017				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		$	34,755			$	34,755			$	–			$	–			$	34,755
Federal funds sold			132				132				–				–				132
Securities available for sale			53,594				–				53,594				–				53,594
Restricted equity securities			2,371				–				2,371				–				2,371
Loans held for sale			1,013				–				1,013				–				1,013
Loans, net			431,104				–				–				433,652				433,652
Bank owned life insurance			8,115				–				8,115				–				8,115
Accrued income			2,619				–				2,619				–				2,619
Financial liabilities
Total deposits			478,944				–				479,777				–				479,777
FHLB borrowings			11,361				–				11,386				–				11,386
Subordinated notes			7,247				–				7,954				–				7,954
Other borrowings			992				–				992				–				992
Accrued interest payable			508				–				508				–				508

 

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2016:

 

(Dollars in Thousands)						Fair value at December 31, 2016
Description		Carrying value as of December 31, 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		$	18,229			$	17,479			$	760			$	–			$	18,239
Federal funds sold			42				42				–				–				42
Securities available for sale			52,975				–				52,975				–				52,975
Restricted equity securities			2,213				–				2,213				–				2,213
Loans held for sale			678				–				678				–				678
Loans, net			415,355				–				–				415,039				415,039
Bank owned life insurance			7,469				–				7,469				–				7,469
Accrued income			2,289				–				2,289				–				2,289
Financial liabilities
Total deposits			450,848				–				451,385				–				451,385
FHLB borrowings			8,000				–				8,031				–				8,031
Subordinated notes			7,224				–				8,012				–				8,012
Other borrowings			1,117				–				1,117				–				1,117
Accrued interest payable			386				–				386				–				386

 

 

Note 8. Reclassifications Out of Other Comprehensive Income

 

Items reclassified in their entirety to net income for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

Details about Other Comprehensive Components		Amounts Reclassified from Other Comprehensive Income for the Three Months Ended September 30,							Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)		2017				2016
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale		$	18			$	43		Gains on sales of investment securities
Tax expense related to realized gains on securities sold			6				15		Income tax expense
		$	12			$	28		Net income

 

Details about Other Comprehensive Components		Amounts Reclassified from Other Comprehensive Income for the Nine Months Ended September 30,							Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)		2017				2016
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale		$	60			$	257		Gains on sales of investment securities
Tax expense related to realized gains on securities sold			20				87		Income tax expense
		$	40			$	170		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. All of the remaining Series C Preferred Stock was converted to common stock on June 29, 2016.

 

		For the Three Months Ended September 30,
		2017												2016
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			5,770,175			$	917			$	0.16				5,763,944			$	903			$	0.16
Series C Preferred Stock Dividends							−												−
Effect of dilutive securities:
Convertible preferred stock			−				−				−				−				−				−
Dilutive stock options			24,602				−				−				10,142				−				−
Earnings per common share, diluted			5,794,777			$	917			$	0.16				5,774,086			$	903			$	0.16

 

 

		For the Nine Months Ended September 30,
		2017												2016
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			5,767,602			$	2,116			$	0.37				4,279,821			$	1,520			$	0.36
Series C Preferred Stock Dividends							−												−
Effect of dilutive securities:
Convertible preferred stock			−				−								1,486,669				−				(0.10	)
Dilutive stock options			24,602				−								10,142				−				−
Earnings per common share, diluted			5,792,204			$	2,116			$	0.37				5,776,632			$	1,520			$	0.26

 

At September 30, 2017 and 2016, the number of stock options considered antidilutive and excluded from the calculation of diluted weighted average shares was 33,000 and 49,500, respectively. 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

 

There were no reportable subsequent events.

 

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, 2016. 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, and 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 Banking Group offers personalized banking solutions to work with customers to clarify financial goals and bring together professionals to satisfy their investment, credit, and other financial needs.

 

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, 2016. 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 less cost to sell, 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 reached $551 million in assets with continued growth in both loans and core deposits.  The Company reported net income of $917 thousand for the quarter ended September 30, 2017 compared to $434 thousand for the previous quarter and $903 thousand for the same period in 2016.  Net Income for the first nine months of 2017 was $2.1 million compared to $1.5 million for the first nine months of 2016.  Earnings per share on a fully diluted basis were $0.16 for the third quarter of 2017 and $0.37 per share for the nine months ended September 30, 2017 compared to $0.16 and $0.26 per share, respectively, for the same periods in 2016. 

 

Profitability was higher in the third quarter of 2017 and the first nine months of 2017 compared to 2016.  The increased profitability in 2017 was due to growth in net interest income and non-interest income as well as a reduction in the provision for loan losses.  Non-interest expenses were higher, mostly due to continued reduction in the OREO portfolio and a partial reduction of incentive bonus accruals in 2016 that are fully accrued in 2017.  A reduction in income tax expense also contributed to the higher profitability compared to 2016.

 

 

Three Months Ended September 30, 2017

 

Net income attributable to HomeTown Bankshares was $917 thousand for the third quarter of 2017, varying favorably from the previous quarter by $483 thousand, and $14 thousand more than the same quarter in 2016. Lower provision for loan losses and noninterest expenses contributed to the increase from the previous quarter while less provision expense also contributed to the increase from the same quarter in 2016. Additionally, net interest income for the third quarter of 2017 varied favorably from the previous quarter and the same quarter last year. Net interest income for the three months ended September 30, 2017 was $61 thousand greater than the previous quarter and $323 thousand more than the third quarter of 2016. Noninterest income declined $276 thousand from the prior quarter and $78 thousand less than the same quarter in 2016. Higher net interest income was slightly offset by a reduction in noninterest income from less service charge fees and gains on sales of investment securities.

 

Net interest income for the three months ended September 30, 2017 totaled $4.4 million, and was $323 thousand or 8% greater than the same quarter in the prior year. The expansion of the loan portfolio and higher yielding investment securities provided $291 thousand in additional interest income. Average loans for the quarter were $434 million, $36 million or 9% more than the third quarter of 2016. Excess funds from increased liquidity were placed in interest bearing bank accounts until needed to fund further loan growth. Average interest-bearing deposits with banks were $600 thousand greater for the third quarter of 2017 than for the same quarter in 2016.

 

Deposits largely funded the expansion of the loan portfolio with total average interest bearing and noninterest-bearing deposits for the third quarter of 2017 of $468 million, an increase of $26 million over the average for the same quarter in 2016. Average FHLB borrowings for the three months ended September 30, 2017 was $11.5 million compared to $9.4 million for the same period in 2016.

 

The net interest margin was 3.46%, 3.48%, and 3.49% for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016, respectively. Deposits were the major source of funding with rates generally increasing while loans have been slower to reprice. Continued downward pressure on rates stemming from competition in the market place also contributed to lower loan yields. Management decreased the level of brokered deposits that generally are more expensive than interest bearing deposits and reduced reliance on them as a funding source favorably impacted the funding mix.

 

  

		For the Three Months Ended September 30, 2017												For the Three Months Ended September 30, 2016
(Dollars in thousands)		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate
Assets:
Federal funds sold		$	124			$	—				1.00	%		$	998			$	1				0.32	%
Deposits in banks			20,903				68				1.28				20,325				33				0.65
Securities, taxable			37,303				244				2.61				39,215				209				2.13
Securities, nontaxable (1)			11,302				75				4.04				14,222				93				3.97
Restricted equity securities			2,371				33				5.57				2,236				31				5.44
Loans held for sale			705				7				4.10				575				5				3.70
Loans (1)			434,170				4,790				4.33				398,451				4,518				4.52
Total earnings assets			506,877				5,217				4.07				476,022				4,890				4.13
Less: Allowance for loan losses			(3,692	)											(3,484	)
Total non-earning assets			36,896												37,881
Total Assets		$	540,081											$	510,419
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking		$	95,588			$	50				0.21	%		$	81,898			$	36				0.17	%
Money market savings			73,699				48				0.26				71,281				44				0.24
Regular savings			51,904				47				0.36				42,741				39				0.36
Time Deposits			138,458				443				1.27				159,393				469				1.17
FHLB borrowings			11,485				51				1.72				9,442				45				1.88
Subordinated notes			7,242				134				7.41				7,212				134				7.40
Other borrowings			709				7				3.98				1,935				9				1.80
Total interest-bearing liabilities			379,085				780				0.82				373,902				776				0.82
Noninterest-bearing liabilities:
Demand deposits			108,487												86,408
Other liabilities			1,873												2,088
Total liabilities			489,445												462,398
Total HomeTown Bankshares Corporation stockholders’ equity			50,164												47,626
Non-controlling interest in consolidated subsidiary			472				—								395				—
Total Liabilities and Stockholders’ Equity		$	540,081				780							$	510,419				776
Net interest income						$	4,437											$	4,114
Interest rate spread											3.25												3.31
Interest expense to average earning assets											0.61												0.64
Net interest margin											3.46	%											3.49	%

 

(1)

Yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.

 

 

		Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
		Increase				Change Due To:
(Dollars in thousands)		(Decrease)				Rate				Volume
Interest income:
Federal funds sold		$	(1	)		$	—			$	(1	)
Deposits in banks			35				33				2
Securities, taxable			35				33				2
Securities, nontaxable			(18	)			1				(19)
Restricted equity securities			2				—				2
Loans held for sale			2				1				1
Loans			272				(118	)			390
Total interest income			327				(50)				377
Interest expense:
Interest bearing liabilities:
Checking			14				7				7
Money market savings			4				2				2
Regular savings			8				—				8
Time Deposits			(26	)			36				(62)
FHLB borrowings			6				(3)				9
Subordinated notes			—				—				—
Other borrowings			(2	)			1				(3)
Total interest expense			4				43				(39)
Net interest income		$	323			$	(93)			$	416

 

A provision for loan losses of $40 thousand was recorded for the three months ended September 30, 2017 compared to $465 thousand in the prior quarter and $111 thousand for the three months ended September 30, 2016. See discussion under Allowance for Loan Losses for additional information.

 

Noninterest income for the third quarter of 2017 was $757 thousand, and was $78 thousand less than the same period last year. ATM and interchange income were up $30 thousand for 2017 compared to 2016 due to growth in customer base and fully implementing the in-house credit card program during the 4^th quarter of 2016. Mortgage banking income was $12 thousand more than the prior year due to a higher volume of mortgages processed and sold. The third quarter of 2017 included $18 thousand in gains realized from the sales of investment securities compared to $43 thousand in the same quarter of 2016. Other income was $37 thousand less for the quarter ended September 30, 2017 compared to the same quarter last year from less service charge fees and gains on sales of investment securities.

 

For the three months ended September 30, 2017, noninterest expense was $3.8 million, $318 thousand or 9.1% more than the $3.5 million recorded in the same quarter last year. Salaries and employee benefits for the three months ended September 30, 2017 were $327 thousand or 18% more than the same three months of 2016. 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 2017 due to a higher volume of new loans and renewals; thus increasing 2017 expense applied to salaries and benefits. Another factor contributing to higher salaries and employee benefits expense was the partial reversal of incentive bonus accruals in 2016 that has fully accrued through September 30, 2017. Mortgage commissions, software expenses and data processing costs due to an increased customer base and core upgrade were also up from the same quarter in 2016.

 

Nine months Ended September 30, 2017

 

Net income attributable to HomeTown Bankshares for the year through September 30, 2017 was $2.1 million, $188 thousand or 9.8% more than the earnings for the same period in 2016. Net interest income and noninterest income varied favorably from the prior year, but were negated by higher noninterest expense.

 

Net interest income was up $1.1 million or 9.6% to $13 million for the first nine months of 2017 over the same period in 2016. Higher loan volume helped to offset lower interest rates on loans and increased interest expense on deposits. A year-over year decline of 7 basis points in the net interest margin was realized from 3.48% for the first nine months of 2017 compared to 3.55% for the same period in 2016.

 

 

		For the Nine Months Ended September 30, 2017												For the Nine Months Ended September 30, 2016
(Dollars in thousands)		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate
Assets:
Federal funds sold		$	74			$	—				0.88	%		$	1,320			$	4				0.37	%
Deposits in banks			19,363				160				1.10				13,212				75				0.76
Securities, taxable			37,977				744				2.61				38,450				614				2.13
Securities, nontaxable (1)			12,114				239				3.99				14,705				295				4.05
Restricted equity securities			2,372				98				5.53				2,464				101				5.45
Loans held for sale			642				20				4.08				472				13				3.79
Loans (1)			429,398				14,103				4.34				384,957				13,103				4.55
Total earnings assets			501,940				15,364				4.08				455,580				14,205				4.21
Less: Allowance for loan losses			(3,718	)											(3,393	)
Total non-earning assets			37,038												45,552
Total Assets		$	535,260											$	497,739
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking		$	93,769			$	130				0.18	%		$	77,818			$	89				0.15	%
Money market savings			72,356				135				0.25				70,769				128				0.24
Regular savings			49,625				130				0.35				41,145				113				0.37
Time Deposits			141,480				1,299				1.23				149,030				1,299				1.17
FHLB borrowings			11,959				148				1.63				16,163				200				1.63
Subordinated notes			7,234				402				7.41				7,204				402				7.46
Other borrowings			1,208				23				2.52				1,565				21				1.78
Total interest-bearing liabilities			377,631				2,267				0.80				363,694				2,252				0.82
Noninterest-bearing liabilities:
Demand deposits			105,904												84,363
Other liabilities			1,925												2,082
Total liabilities			485,460												450,139
Total HomeTown Bankshares Corporation stockholders’ equity			49,347												47,213
Non-controlling interest in consolidated subsidiary			453				—								387				—
Total Liabilities and Stockholders’ Equity		$	535,260				2,267							$	497,739				2,252
Net interest income						$	13,097											$	11,953
Interest rate spread											3.28												3.39
Interest expense to average earning assets											0.60												0.66
Net interest margin											3.48	%											3.55	%

 

(1)

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

 

 

		Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
		Increase				Change Due To:
(Dollars in thousands)		(Decrease)				Rate				Volume
Interest income:
Federal funds sold		$	(4)			$	5			$	(9)
Deposits in banks			85				34				51
Securities, taxable			130				60				70
Securities, nontaxable			(56)				(5)				(51)
Restricted equity securities			(3)				1				(4)
Loans held for sale			7				1				6
Loans			1,000				(434)				1,434
Total interest income			1,159				(338)				1,497
Interest expense:
Interest bearing liabilities:
Checking			41				19				22
Money market savings			7				4				3
Regular savings			17				(5)				22
Time Deposits			—				59				(59)
FHLB borrowings			(52)				—				(52)
Subordinated notes			—				—				—
Other borrowings			2				1				1
Total interest expense			15				78				(63)
Net interest income		$	1,144			$	(415)			$	1,559

 

The year to date provision for loan losses totaled $575 thousand for the nine months ended September 30, 2017 compared to $979 thousand for the same period in 2016. See discussion under Allowance for Loan Losses for additional information.

 

For the year to date through September 30, 2017, noninterest income totaled $2.5 million, an increase of $168 thousand or 7.2% over the same period in 2016. Gains on the sales of investment securities were down $197 thousand while ATM and interchange income were up $121 thousand for the first nine months of 2017 compared to 2016 due to growth in customer base and fully implementing the in-house credit card program during the 4^th quarter of 2016. Other income was $207 thousand higher for the nine months ended September 30, 2017 compared to the same period in 2016. Favorable variances from the continued growth of merchant processing income, investment brokerage commission fees, and a one-time bankruptcy settlement of $172 thousand contributed to the increase.

 

For the nine months ended September 30, 2017, noninterest expense was $11.9 million, $1.8 million or 18% more than the $10 million recorded during the same period in 2016. Salaries and employee benefits for the first nine months of 2017 were $1 million or 21% more than the same period in 2016. The number of full time equivalent employees were 103 and 99 at September 30, 2017 and September 30, 2016, respectively. The increase was due to several factors including the implementation of an in-house credit card program and additional operations personnel to support the continued loan and deposit growth. Other factors included unfilled open positions in the prior year, and new positions to accommodate growth, as well as annual merit raises. Also contributing to the increase was the deferral of less loan origination costs, in accordance with ASC 310-20. As discussed in the quarter to quarter comparison, a write-down on other real estate owned also contributed to higher noninterest expense. Bank Franchise Taxes were also 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.

 

Assets totaled $551 million at September 30, 2017, an increase of $34 million or 6.6% since year end 2016. The continued expansion of the loan portfolio by $15.8 million during the nine months since December 31, 2016, accounted for nearly half of the asset growth. Excess funds held in liquid cash and due from accounts on the last day of the third quarter 2017 were $16.5 million higher than December 31, 2016.

 

 

The Company’s liabilities at September 30, 2017 totaled $501 million compared to $469 million at December 31, 2016, an increase of $31.7 million or 6.8%. Total deposits rose $28.1 million during the same period to $479 million at September 30, 2017. Core deposits, which exclude brokered deposits and retail CD’s over $250 thousand, totaled $437 million at September 30, 2017 and were $24 million more than at year end 2016.

 

At September 30, 2017 and December 31, 2016, the stockholders’ equity of HomeTown Bankshares was $50.2 million and $47.8 million, respectively, an increase of $2.4 million. The change in stockholders’ equity in the first nine months of 2017 was primarily the result of net income.  

 

Non-performing Assets

 

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

 

		September 30, 2017				December 31, 2016
(Dollars in thousands)
Real Estate:
Construction and land development		$	—			$	—
Residential 1-4 families			459				577
Commercial real estate			211				336
Commercial loans			27				11
Equity lines			—				—
Loans to individuals			3				—
Total nonperforming loans			700				924
Other real estate owned			3,562				3,794
Total nonperforming assets, excluding performing restructured loans			4,262				4,718
Performing restructured loans			3,930				6,160
Total nonperforming assets, including restructured loans		$	8,192			$	10,878

 

Total nonperforming assets, including restructured loans, declined $2.7 million during the first nine months of 2017. A commercial real estate loan in the net amount of $2.4 million, after a $430 thousand charge-off, was placed on nonaccrual status in the second quarter of 2017. During the third quarter of 2017, this commercial real estate loan was repaid in the amount of $2.4 million, with no further loss.  A 1-4 family residential loan was placed on nonaccrual status and a 1-4 family loan, previously on nonaccrual status, was repaid during the third quarter of 2017 in the amounts of $459 thousand and $577 thousand, respectively.  A commercial real estate loan in the amount of $108 was returned to accrual status during the third quarter of 2017. A restructured loan for $2.2 million that was performing at December 31, 2016 was paid off by the borrower in January 2017. A residential home in Roanoke County was recorded into other real estate owned in the amount of $1.0 million during September 2017. During the third quarter, sales of residential lots reduced other real estate owned by $209 thousand.  A warehouse in Salem, which had been foreclosed on in April 2011 and had been subject to several write-downs, was sold in the first quarter of 2017 without any further loss and accounted for $599 thousand of the reduction in other real estate owned since year end 2016. In addition, a write-down was recorded in the amount of $380 thousand during the second quarter of 2017 on a residential development property.  A payment on this same residential development property reduced the other real estate owned balance by $21 thousand.

 

Troubled debt restructurings (“TDR’s”) were comprised of five loans totaling $4.2 million at September 30, 2017.  This compares to $6.4 million in total restructured loans at December 31, 2016. Two of the five loans totaling $3.9 million were accruing interest at September 30, 2017. The remaining three loans were to one borrower and totaled $238 thousand and were included in non-accruing loans at September 30, 2017. Three TDRs totaling $757 thousand were past due with their restructured terms at September 30, 2017. See Note 3 for more information.

 

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2017 and December 31, 2016 are included in Note 5, and the activity in other real estate owned for the first nine months of 2017 and 2016 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 nine months of 2017, a provision of $575 thousand was recorded. Total net charge offs for the year through September 30, 2017 were $505 thousand. The increase in net charge offs was the main reason for additional provision for loan losses in the third quarter of 2017. Loan growth also contributed to the need for additional provision in 2017.

 

 

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 were zero at September 30, 2017 and $17 thousand at December 31, 2016.  Impaired loans totaled $4.8 million at September 30, 2017, and were $2.6 million less than the balance at year end 2016.  The decrease resulted from principal paydowns and the payoff of loans throughout 2017.

 

The percentage of the allowance for loan losses to total loans was 0.85% at September 30, 2017, and 0.87% at December 31, 2016.  Unallocated reserves were $9 thousand at September 30, 2017 and $122 thousand at December 31, 2016. Some surplus or unallocated reserve is desirable given the inherent weakness in this type of predictive analysis. The allowance for loan losses to nonaccrual loans was 529% at September 30, 2017 and 394% at December 31, 2016. Past due and non-accruing loans to total loans was 0.86% at September 30, 2017 compared to 0.51% at December 31, 2016.  

 

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 $76.6 million at September 30, 2017, compared to $59.2 million at December 31, 2016.   Higher levels of commercial noninterest bearing deposits contributed to higher levels of liquidity at the end of the third quarter 2017. Commercial deposits remain volatile and withdrawals may result in less liquidity in the future. Surges and declines in commercial deposits will continue to impact liquidity in an unpredictable manner.

 

The Company’s primary source of funding is its retail deposit base. The Company aggressively markets in its trade area and seeks demand deposits through service-related tactics and savings and time deposits through competitive pricing tactics. If deposits are not an attractive source for funding, either for reasons of maturity or pricing, alternative sources include FHLB advances, brokered deposits, fed funds purchased and lines of credit. The Company is approved to borrow 25% of our total assets from the FHLB subject to providing qualifying collateral.  At September 30, 2017, the Company had borrowed $11.4 million of the $25.8 million of lendable collateral value, leaving $14.4 million of unused credit immediately available. The Company also had $36.5 million of fed funds lines of credit available at September 30, 2017. In addition, the Company had access to a $10.0 million credit line through Promontory’s Insured Cash Sweep (ICS) one way buy program at a rate of the one-month LIBOR plus 11 basis points. At September 30, 2017, there were no advances on the fed funds or credit 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. The Company’s stock is traded on the NASDAQ Capital Market under the symbol “HMTA”.

 

 

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 $3.4 million of retained earnings at September 30, 2017. No cash dividends were paid to common stockholders in the first nine months of 2017.

 

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 September 30, 2017 and December 31, 2016.

 

Risk Based Capital Analysis

 

Capital Analysis

 

HomeTown Bank		September 30, 2017				December 31, 2016
(Dollars in thousands)
Common Equity Tier 1 Capital:
Common Stock		$	14,697			$	14,697
Surplus			32,187				32,078
Retained Earnings			10,326				8,008
Common Equity Tier 1 Capital			57,210				54,783
Tier 1 Capital:
Tier 1 Minority Interest			25				17
Tier 1 Capital			57,235				54,800
Total Capital:
Allowance for Loan Losses (allowable portion)			3,706				3,636
Total Capital		$	60,941			$	58,436

 

The Bank’s total capital increased $2.5 million from December 31, 2016 to September 30, 2017, primarily as the result of the retained $2.4 million ($2.6 million gross minus a $.2 million dividend to the parent company) year to date September 30, 2017 net income attributable to the bank and noncontrolling interest.

 

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 September 30, 2017		Actual								Minimum Capital Requirement including the Capital Conservation Buffer for 2017								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)		$	60,941				12.54	%		$	44,936				9.250	%		$	48,580				10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		$	57,210				11.78	%		$	27,933				5.750	%		$	31,577				6.50	%
Tier I Capital (to Risk-Weighted Assets)		$	57,235				11.78	%		$	35,220				7.250	%		$	38,864				8.00	%
Tier I Capital (to Average Assets)		$	57,235				10.60	%		$	21,602				4.00	%		$	27,003				5.00	%

 

HomeTown Bank December 31, 2016		Actual								Minimum Capital Requirement including the Capital Conservation Buffer for 2016								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)		$	58,436				12.59	%		$	40,045				8.625	%		$	46,429				10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		$	54,783				11.80	%		$	23,795				5.125	%		$	30,179				6.50	%
Tier I Capital (to Risk-Weighted Assets)		$	54,800				11.80	%		$	30,759				6.625	%		$	37,143				8.00	%
Tier I Capital (to Average Assets)		$	54,800				10.67	%		$	20,537				4.00	%		$	25,671				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 September 30, 2017, outstanding commitments to extend credit including letters of credit were $117 million. There are no commitments to extend credit on impaired loans.

 

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

 

Recent Accounting Pronouncements

 

In January 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.

 

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. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

 

During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

 

During March 2017, the FASB issued ASU 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

 

 

During March 2017, the FASB issued ASU 2017‐08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017‐08 will have on its consolidated financial statements.

 

During May 2017, the FASB issued ASU 2017‐09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company is currently assessing the impact that ASU 2017‐09 will have on its consolidated financial statements.

 

During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements.

 

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4.         CONTROLS AND PROCEDURES

 

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

 

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

 

 

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 September 30, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2017, and December 31, 2016; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017, and 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017, and 2016;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (v) Notes to Consolidated Financial Statements.

 

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

 

 

SIGNATURES

 

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

 

HOMETOWN BANK
Date: November 14, 2017		By:	/S/ SUSAN K. STILL
			Susan K. Still
			President
			Chief Executive Officer
Date: November 14, 2017		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 September 30, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2017, and December 31, 2016; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017, and 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017, and 2016;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; 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.

 

 

37