PART I

 

ITEM  1.

BUSINESS.

 

Overview and History

 

General

 

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

 

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

 

On October 1, 2018, the Company and American National Bankshares, Inc. (“American National”) announced a definitive agreement to combine in a strategic merger (the “Merger Agreement”) pursuant to which the Company will merge with and into American National (the “Merger”). As a result of the Merger, the holders of shares of the Company's common stock will receive 0.4150 shares of American National common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to be completed in the second quarter of 2019, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.

 

HomeTown Bank

 

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

 

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

 

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

 

Principal Products of the Bank

 

The Bank offers a full range of banking services to small and medium-size businesses, real estate investors and developers, private investors, professionals and individuals.  In addition to its main office, the Company has full-service offices in Franklin County, Virginia at Westlake, in the town of Christiansburg, Virginia at 2950 Market Street, in Roanoke County, Virginia at the intersection of Colonial Avenue and Virginia Route 419, in the City of Roanoke, Virginia at 3521 Franklin Road, and in the City of Salem, at 852 West Main Street.

 

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

 

 

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

 

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

   

Consumer Residential Mortgage Origination. The Bank has expanded their residential mortgage origination operations over the last few years. Initially, the Bank originated loans as a representative for mortgage companies. Then, in February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office.  In 2013 HomeTown Bank entered into a joint venture agreement with a mortgage company as 49% owner of HomeTown Residential Mortgage, LLC. The new entity began operations at the end of 2013, absorbing the Bank’s mortgage office employees and continued working from the Colonial Avenue office. The mortgage office operates under the name HomeTown Mortgage and coordinates the Bank’s existing mortgage services and offers mortgages, refinancing, and other services. In 2016, an additional mortgage banker was hired and is based at the Christiansburg branch in order to better serve the New River Valley market. Loans originated are conforming home mortgages in its market area, as defined below. As part of the Bank’s overall risk management strategy, loans originated and closed by the mortgage office are pre-sold to major national mortgage banking or financial institutions. In addition to creating customer relationships and the opportunity to sell other products and services, the bank receives fee income for this service.

 

Investment Services. HomeTown Investment Services, Inc., opened in April 2013, provides diverse investment products and financial advisory services to existing and prospective customers. These products and services provide another source of revenue for the Company. Investment and insurance products and services are offered through an unaffiliated entity LPL Financial, Member FINRA/SIPC. HomeTown Investment Services, Inc. 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.  Revenue from investment services is comprised mostly of fees based upon the market value of the accounts under administration as well as commissions on investment transactions.

 

Private Banking. At the end of 2015, the Bank began offering personalized banking solutions to work with customers to clarify financial goals and bring together professionals to satisfy their investment, credit and other financial needs. Revenue from private banking management activities is comprised mostly of interest income earned on loans and service charges and fees from deposit products. 

 

Merchant Card Services. The Bank offers comprehensive payment processing solutions giving businesses the ability to accept all major credit cards, either at a terminal, online, via a mobile device or tablet, or over the phone.

 

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

 

Market Area

 

The Bank’s market area primarily consists of the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Botetourt, Bedford, Franklin and Montgomery. Total population in the market area is approximately 450,000. The area is serviced by one daily newspaper, at least 6 weekly, multi-weekly or bi-weekly newspapers and a number of radio and television stations providing diverse media outlets. The City of Roanoke and Roanoke County, the location of three of the Bank’s offices, has the largest population base, with approximately 190,000 persons. The Roanoke market area is diversified by industry groups with services, retail trade, manufacturing, construction, transportation, utilities, finance, insurance and real estate. Roanoke is a regional center for banking, medicine and the legal and business professional community. Carilion Clinic, Veterans Affairs, Kroger, and HCA Virginia Health System are among Roanoke’s largest private employers. Other major employers are the local school boards, municipal governments, and universities including Virginia Tech, Roanoke College, and Hollins University.

 

 

Employees

 

As of December 31, 2018, the Company had 97 employees, including 97 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements, and relations with employees are considered positive.

 

Governmental Monetary Policies

 

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

   

Competition

 

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

 

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

 

Cyber Security

 

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

 

Supervision and Regulation

 

HomeTown Bankshares Corporation

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

•

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

 

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

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

 

HomeTown Bank

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Volcker Rule. The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests over certain thresholds in private equity and hedge funds. Final rules implementing the Volcker Rule were adopted on December 10, 2013. The final rules require entities to establish internal compliance programs which may include making regular reports about those activities to regulators. The final rules were effective April 1, 2015, with full compliance being phased in over a period which ended on July 21, 2016.  The Volcker Rule has been subject to much commentary from the banking industry and the Company continues to evaluate the impact the Rule will have on the industry and the Company in particular.

 

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

 

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

 

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

 

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

 

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

 

 

ACCESS TO FILINGS

 

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

 

 Executive Officers of the Registrant

 

The following table shows the Company’s executive officers as of March 30, 2019 and their areas of responsibility. The executive officer biographies follow the table.

 

Name		Age		Position
Susan K. Still		65		President & CEO
Vance W. Adkins		38		Executive Vice President & CFO

 

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

 

Vance W. Adkins has served as Executive Vice President and Chief Financial Officer of the Company since August 2016. Mr. Adkins served as the Company’s Senior Risk Officer from October 2010 to August 2016.

 

ITEM 1A.

RISK FACTORS.

 

Not Required.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

Not Required.

 

ITEM 2.

PROPERTIES.

  

As of March 29, 2019, the Company through its wholly owned subsidiary HomeTown Bank (the “Bank”), conducted its business from the following six locations: i) 202 S. Jefferson Street Roanoke, Virginia (the “Downtown Office”), which also serves as the Bank’s main office and operations processing center; ii) a branch office located at 13400 Booker T. Washington Highway, Moneta, Virginia (the “Smith Mountain Lake Office”); iii) a branch office at 4225 Colonial Avenue, Roanoke, Virginia (the “Colonial Avenue at 419 Office”); iv) a branch office at 3521 Franklin Road, Roanoke, Virginia (the “South Roanoke Office”); v) a branch office at 2950 Market Street, Christiansburg, Virginia (the “Christiansburg Office”); vi) a branch office at 852 West Main Street, Salem, Virginia (the “Salem Office”).

 

The Downtown Office. The Bank leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia. The original lease expired on December 31, 2016, which provided an option to extend the lease for two additional five-year periods. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for one additional ten-year term at expiration. The Downtown Branch opened on November 14, 2005. 

 

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

 

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

 

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

 

 

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

  

Salem Office. The Bank purchased property at 852 West Main Street, Salem on September 2, 2011. A stand-alone fully operational ATM was completed and put into service April 15, 2013, and on July 28, 2015, a full service branch office opened at this location. 

 

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

 

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

 

ITEM 3.

LEGAL PROCEEDINGS.

 

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

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

PART II

 

ITEM 5.

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

          

Market Information and Holders

  

Shares of the Company’s common stock, $5.00 par value per share, were listed and began trading on NASDAQ on October 12, 2016 under the symbol “HMTA.” The NASDAQ listing increases visibility to those outside of the Company’s core operating markets and enables current and future shareholders greater liquidity to trade shares. Prior to listing on NASDAQ, shares were not listed on any stock exchange, however were quoted on the Over the Counter Bulletin Board under the same stock symbol “HTMA”. Based on available information, the Company believes that from January 1, 2018 to December 31, 2018, the selling price of shares of its common stock ranged from $10.95 to $16.50, and that approximately 1,759 thousand shares were traded. There may, however, have been other transactions at other prices not known to the Company.

 

As of March 14, 2019, there were 5,815,623 shares of the Company’s common stock outstanding, which shares were held by 2,265 shareholders of record.

 

 

ITEM 6.

SELECTED FINANCIAL DATA.

          

Not Required.

 

ITEM 7.

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

        

Forward-Looking Statements

 

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

 

•

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

 

•

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

 

•

interest rate fluctuations;

 

•

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

 

•

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

 

•

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

 

•

changes in laws and regulations applicable to us;

 

•

changes in general economic and business conditions;

 

•

competition within and from outside the banking industry;

 

•

problems with our technology;

 

•

changing trends in customer profiles and behavior; and

 

•

new products and services in the banking industry.

 

On October 1, 2018, HomeTown Bankshares Corporation ("HomeTown" and American National Bankshares Inc. ("American National") entered into an Agreement and Plan of Reorganization ("the Merger Agreement") pursuant to which HomeTown will merge with and into American National (the "Merger").  American National will be the surviving corporation in the Merger.  In addition to the factors described above, the Company's operations, performance, business strategy and results may be affected by the following factors:

 

•

the costs associated with the completion of the merger and the realization of the benefits expected to be obtained in connection with the merger, including management’s time and energy and potential opportunity cost;

 

•

the potential risks of diverting management attention and resources from the operation of HomeTown’s business and toward the completion of the merger;

 

•

the restrictions on the conduct of HomeTown’s business during the period between the execution of the merger agreement and the completion of the merger;

 

•

the possibility that the merger and the related integration process could result in the loss of key employees, in the disruption of HomeTown’s on-going business and in the loss of customers;

 

•

the challenges in absorbing the effect of any failure to complete the merger, including potential payment of a termination fee and market reactions;

 

•

the possibility of litigation challenging the merger, and its belief that any such litigation would be without merit.

 

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

 

Critical Accounting Policies

 

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

 

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

  

 

Allowance for Loan Losses

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

 

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

 

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

 

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

 

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

 

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure.  Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties.  The Company may incur additional writedowns of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions. 

 

Deferred Tax Assets and Liabilities

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized.  "More likely than not" is defined as greater than a 50% chance.  Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. 

 

General

 

Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the financial condition and results of operations of the Company and the Bank as of and for the years ending December 31, 2018 and 2017. This discussion should be read in connection with the Company’s Consolidated Financial Statements and the accompanying Notes thereto included in this Form 10-K.

 

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

 

 

The Business

 

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

 

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

 

On October 1, 2018, HomeTown Bankshares entered into a Merger Agreement with American National.  The Merger of  HomeTown with and into American National  is expected to be completed in the second quarter of 2019.

 

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

 

Discussion of Results of Operations

 

Overview of Results of Operations

 

Net income attributable to HomeTown Bankshares Corporation for 2018 totaled $4.0 million and was $1.5 million higher than the prior year. Total assets were up year-over-year due to continued solid loan growth supported by strong growth in core deposits. Earnings per share on a fully diluted basis were $0.68 per share for the 2018 fiscal year, up from $0.43 per share, for fiscal year 2017. The growth in profitability as well as loans and core deposits was achieved in spite of $788 thousand of merger related expenses following the announced plan on October 1, 2018 to merge with American National Bank in the second quarter of 2019. An improved net interest margin, a lower provision for loan losses, and higher noninterest income due to the income from life insurance benefit all contributed to a 58%. increase in net income in 2018 over the prior year.

 

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

 

		For the years ended
		2018				2017				2016
Return on average assets			0.71	%			0.46	%			0.50	%
Return on average equity			7.60	%			5.02	%			5.31	%
Average equity to average assets			9.30	%			9.21	%			9.46	%

 

Summary of Financial Condition

 

Total assets of the Company were $565 million at December 31, 2018, compared to $550 million at the previous year end. The net loan portfolio increased $27.0 million or 6.1% from the end of 2017 to December 31, 2018, and contributed to a $15 million or 2.7% increase in total assets during the period. Residential real estate accounted for 79.7% of the total $27.3 million increase in gross loans. Total deposits increased 3.3% year over year and fell short of the dollar increase in loans. From December 31, 2017 to December 31, 2018, cash increased $1.1 million or 4.9%.

 

Securities available for sale were $45.0 million and $55.3 million at the end of 2018 and 2017, respectively. The yields on securities available for purchase continued to be relatively low, and the Company continued to channel cash flow from lower rate investments in bonds to higher rate loans.

 

Bank owned life insurance (BOLI) decreased $0.5 million during the year ended December 31, 2018 to $8.2 million at the end of the year due to the payout of a death benefit. BOLI is the funding mechanism for the Supplemental Executive Retirement Plan (SERP) provided to executive management. The liability for the SERP is included in other liabilities. The SERP is discussed in greater detail in Note 14 Salary Continuation Plan.

 

Total liabilities at December 31, 2018 were $511 million, compared to $499 million at the end of 2017, an increase of $11.9 million or 2.4%.  Total deposits rose $15.9 million, while FHLB borrowings declined $3.1 million. Core deposits increased $19.6 million resulting in a decrease in reliance on wholesale funding.

 

Stockholders’ equity was $53.7 million at December 31, 2018, $2.8 million or 5.5% above the $50.9 million at the end of the previous year.  Net income available to common stockholders of $4.0 million raised the level of retained earnings to $7.0 million at December 31, 2018, compared to $3.8 million at December 31, 2017 and enabled the Company to begin paying cash dividends in 2018 which totaled $697 thousand for the year. Management believes the Company has sufficient capital to fund its operations while the Company strives to generate profits on a consistent basis, but there can be no assurance that this will be the case.

 

 

Non-performing Assets

Non-performing assets consist of nonaccrual loans, restructured loans, and repossessed and foreclosed assets. Following is a breakdown of non-performing assets:

 

		December 31,
(Dollars in thousands)		2018				2017				2016				2015				2014
Real Estate:
Construction and land development		$	125			$	274			$	—			$	11			$	—
Residential 1-4 families			532				173				577				—				475
Commercial real estate			463				209				336				368				758
Commercial loans			162				403				11				47				—
Equity lines			400				49				—				—				—
Loans to individuals			1				36				—				—				21
Total nonperforming loans			1,683				1,144				924				426				1,254
Other real estate owned			1,893				3,249				3,794				5,237				6,986
Total nonperforming assets, excluding performing restructured loans			3,576				4,393				4,718				5,663				8,240
Performing restructured loans			3,765				3,889				6,160				6,398				6,052
Total nonperforming assets, including restructured loans		$	7,341			$	8,282			$	10,878			$	12,061			$	14,292

 

The five-year trend of non-performing assets reflects continued improvement in the economy. Nonperforming assets, including restructured loans were 1.30% of total assets at the end of 2018, compared to 1.51% at the end of 2017 and 2.10% at the end of 2016.

 

Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and consumer loans are designated as non-accrual when payment is delinquent 90 days or at the point which the Company considers collection doubtful, if earlier. When loans are placed in non-accrual status, interest previously accrued and unpaid interest is reversed against interest income in the current period and interest is subsequently recognized only to the extent cash is received and if principal repayment is probable. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Most non-accrual loans are classified as impaired. Impaired loans are evaluated periodically on an individual basis, and if appropriate, losses are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

Total nonperforming assets, including restructured loans, declined $941 thousand from December 31, 2017 to December 31, 2018. The level of nonperforming loans at December 31, 2018 was $539 thousand higher than the level at December 31, 2017, while other real estate owned declined $1.4 million. Write-downs of other real estate owned totaled $158 thousand during the year 2018 compared to $588 thousand in 2017. Performing restructured loans decreased $124 thousand year over year

 

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less anticipated selling cost. Valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell.

 

See also Note 5 of the Notes to Consolidated Financial Statements for information on changes in other real estate owned and for the major classifications of other real estate owned for 2018 compared to 2017.  

 

Net Interest Income and Net Interest Margin

 

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

 

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

 

 

For the year 2018, net interest income totaled $18.8 million; an increase of $1.2 million or 6.6% over the $17.6 million earned in the previous year. The expansion of earning assets, primarily loans, continued to be the driving force underlying increases in net interest income. For the year ended December 31, 2018, average earning assets totaled $524 million and were $17.4 million or 3.4% higher than the average of $506 million for 2017.  The increased volume of loans provided $1.3 million additional interest income in 2018 while higher yields contributed $501 thousand. The average volume of the investment portfolio declined slightly but was offset by a higher tax equivalent yield. Decreases in balances on deposits in banks were partially offset by increases in yields.

 

The net interest margin was 3.55% for the year 2018 compared to 3.47% for the previous year. This was primarily a result of an increase in loan yields. Loan yields rose 13 basis points to 4.46% during 2018. Increases in the federal funds rate led to higher loan interest rates, partially offset by increased liquidity in the markets, which fostered competition among commercial banks and other financial services industries to satisfy growing loan demand. Total average deposits increased $14.7 million in 2018 compared to 2017. Higher interest rates driven by federal funds rate increases contributed to the 15 basis point increase in the cost of funds, partially negating higher loan yields. Management expects rates paid on deposits products will rise in 2019. The more volatile non-interest bearing deposits averaged $8.6 million more than last year.

 

The Federal Reserve develops monetary policy to attain its objectives of maximum employment and price stability. The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate 25 basis points four times in 2018 - March 21, June 13, September 26 and December 19 to a target range of 2.25 to 2.50%. The Company expects the Federal Reserve to continue to raise rates in 2019.  

 

 

The following table illustrates average balances of total interest-earning assets and total interest bearing liabilities for 2018, 2017 and 2016, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.

 

Average Balances, Interest Income and Expense, Yields and Rates

 

		2018												2017												2016
(Dollars in thousands)		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate
Assets:
Federal funds sold		$	205			$	3				1.62	%		$	92			$	1				1.00	%		$	998			$	3				0.37	%
Deposits in banks			10,188				185				1.82				19,579				224				1.14				14,125				104				0.74
Securities, taxable			41,299				1,102				2.67				39,518				1,031				2.61				38,501				837				2.18
Securities, nontaxable (1)			8,011				229				3.61				11,535				308				4.05				14,574				388				4.03
Restricted equity securities			2,557				151				5.89				2,372				132				5.56				2,401				131				5.46
Loans held for sale			512				24				4.64				658				26				4.00				512				19				3.74
Loans (1)			460,736				20,796				4.46				432,337				18,947				4.33				390,672				17,692				4.53
Total earnings assets			523,508				22,490				4.26	%			506,091				20,669				4.07	%			461,783				19,174				4.20	%
Less: Allowance for loan losses			(3,898	)											(3,705	)											(3,433	)
Total non-earning assets			40,135												37,469												43,329
Total Assets		$	559,745											$	539,855											$	501,679
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking		$	105,043			$	283				0.27	%		$	97,172			$	196				0.20	%		$	80,128			$	127				0.16	%
Money market savings			80,517				432				0.54				72,765				181				0.25				70,877				172				0.24
Regular savings			51,093				217				0.43				50,803				185				0.36				41,931				152				0.36
Time Deposits			130,022				1,909				1.47				139,792				1,720				1.23				149,969				1,765				1.18
Total interest-bearing deposits			366,675				2,841				0.77				360,532				2,282				0.63				342,905				2,216				0.65
FHLB borrowings			14,605				299				2.02				11,755				197				1.65				14,176				237				1.65
Subordinated notes			7,268				536				7.38				7,238				537				7.41				7,208				536				7.44
Other borrowings			515				24				4.52				1,079				30				2.74				1,546				29				1.83
Total interest-bearing liabilities			389,063				3,700				0.95				380,604				3,046				0.80				365,835				3,018				0.82
Non-interest-bearing liabilities:
Demand deposits			115,623												107,072												85,846
Other liabilities			2,576												1,981												2,135
Total liabilities			507,262				3,700								489,657				3,046								453,816				3,018
Total HomeTown Bankshares Corporation stockholders’ equity			52,056				—								49,732				—								47,467				—
Noncontrolling interest in consolidated subsidiary			427												466												396
Total Stockholders’ equity			52,483				—								50,198				—								47,863				—
Total Liabilities and Stockholders’ Equity		$	559,745				3,700							$	539,855				3,046							$	501,679				3,018
Net interest income						$	18,790											$	17,623											$	16,156
Interest rate spread											3.31												3.27												3.38
Interest expense to average earning assets											0.71												0.60												0.65
Net interest margin											3.55	%											3.47	%											3.55	%

 

(1) Yields are reported on a tax equivalent basis assuming a federal income tax rate of 21 percent in 2018 and 34 percent in 2017 and 2016.

 

 

Rate and Volume Analysis

 

		2018 Compared to 2017												2017 Compared to 2016
		Increase				Change Due To:								Increase				Change Due To:
(Dollars in thousands)		(Decrease)				Rate				Volume				(Decrease)				Rate				Volume
Interest income:
Federal funds sold		$	2			$	1			$	1			$	(2	)		$	7			$	(9	)
Deposits in banks			(39	)			132				(171	)			120				58				62
Securities, taxable			71				(2	)			73				194				84				110
Securities, nontaxable			(79	)			21				(100	)			(80	)			1				(81	)
Restricted equity securities			19				8				11				1				3				(2	)
Loans held for sale			(2	)			4				(6	)			7				1				6
Loans			1,849				501				1,348				1,255				(538	)			1,793
Total interest income			1,821				665				1,156				1,495				(384	)			1,879
Interest expense:
Interest bearing liabilities:
Checking			87				66				21				69				35				34
Money market savings			251				209				42				9				5				4
Regular savings			32				31				1				33				1				32
Time Deposits			189				308				(119	)			(45	)			69				(114	)
FHLB borrowings			102				44				58				(40	)			—				(40	)
Subordinated notes			(1	)			(2	)			1				1				(2	)			3
Other borrowings			(6	)			5				(11	)			1				2				(1	)
Total interest expense			654				661				(7	)			28				110				(82	)
Net interest income		$	1,167			$	4			$	1,163			$	1,467			$	(494	)		$	1,961

 

Noninterest Income

 

Noninterest income includes service charges on deposit accounts, ATM and interchange income, brokerage fees on non-portfolio mortgage loans, and net gains on securities sales. Noninterest income increased $415 thousand or 12.6% for the year 2018 compared to the prior year.  Excluding gains on sales of investment securities and income from life insurance death benefit, core noninterest revenue for 2018 was $218 lower than the prior year. ATM and interchange income for 2018 was $218 thousand or 26.0% more than the year 2017 due to the expansion of the customer base. Revenue from mortgage banking was $247 thousand or 25.8% lower than the prior year and correlated with rising interest rates that impacted home sales levels. A one-time bankruptcy settlement of $172 thousand was included in 2017 other income and contributed to the decrease when compared to 2018.

 

Noninterest Income

 

		Period Ended December 31,
(Dollars in thousands)		2018				2017				$ Change				% Change
Service charges on deposit accounts		$	578			$	544			$	34				6.3	%
ATM and interchange income			1,055				837				218				26.0
Mortgage banking income			712				959				(247	)			(25.8	)
Net gains on sales of investment securities			60				69				(9	)			(13.0	)
Income from life insurance death benefit			642				-				642				N/A
Investment brokerage income			102				162				(60	)			(37.0	)
Increase in cash surrender value of bank owned life insurance			202				200				2				1.0
Merchant processing income			167				137				30				21.9
Other income			180				375				(195	)			(50.6	)
Total noninterest income		$	3,698			$	3,283			$	415				12.6	%

 

Noninterest Expense

 

Non-interest expense includes, among other things, salaries and benefits, occupancy costs, data processing, advertising and marketing, and professional fees.  Total noninterest expense increased $1.1 million or 7.0%, to $17.1 million for 2018.  The Company’s management and staff monitor and control operating expenses to provide adequate operational support and enable growth opportunities.

 

 

Salaries and employee benefits for 2018 were $8.6 million compared to $8.1 million for the prior year. The $550 thousand or 6.8% increase includes the wages for the position of  Chief Risk Officer that was vacant for approximately  nine months in 2017.  In 2017 much of the Company's internal audit work was outsourced and the cost included in professional fees.  A higher performance based bonus accrual reflected the increase in net income for 2018 over 2017.  Other factors contributing to higher personnel expense were annual merit raises, and the acceleration of the vesting of all remaining restricted stock related to the death of a former executive.  

 

Occupancy and equipment expense totaled $1.7 million for the year ended December 31, 2018, unchanged from the prior year, while discretionary spending on advertising and marketing increased by $69 thousand or 11.9% from the prior year.

 

Professional fees decreased by $167 thousand or 28.4% in 2018 compared to 2017. In 2017 much of the Company's internal audit work was outsourced and the cost included in professional fees. Data processing expense for 2018 was $184 thousand or 14.0% higher than 2017. The increase reflected additional processing costs incurred from the expansion of the core deposit customer base.

 

Bank Franchise Tax was $20 thousand or 5.0% higher for 2018 than for 2017. The increase in the Bank’s equity from retained earnings, and the reduction in real estate taxes paid on foreclosed properties, which are deducted from capital on the Bank Franchise return, were factors contributing to the increase in the Bank Franchise Tax in 2018.

 

Losses on sales and write-downs of other real estate were $247 thousand lower in 2018 than 2017. During 2017, a property acquired in 2011 for $1.2 million, and carried at $599 thousand at December 31, 2016, was written down an additional $380 thousand and sold for a $7 thousand gain before year end December 31, 2017. The year 2017 included additional writedowns totaling $208 thousand.

 

Merger-related expense totaled $788 thousand in 2018 and included an investment banker's opinion, legal fees related to the merger agreement and executive compensation.  Also included was the cost associated with the acceleration of restricted stock awards and stock options  vested and exchanged for cash payments for certain executives as part of the merger agreement.  

 

Other expenses were $1.5 million in 2018 compared to $1.7 million in 2017. Other expense includes compliance costs, office supplies and printing costs, and a number of other fees and expenses. The majority of the $158 thousand decrease was due to one-time costs incurred directly related to the core system conversion in 2017.

 

Non-Interest Expense

 

		Period Ended December 31,
(Dollars in thousands)		2018				2017				$ Change				% Change
Salaries and employee benefits		$	8,648			$	8,098			$	550				6.8	%
Occupancy and equipment expense			1,676				1,650				26				12.8
Advertising and marketing expense			606				537				69				11.9
Professional fees			421				588				(167	)			(28.4	)
Data processing expense			1,498				1,314				184				14.0
Bank franchise taxes			419				399				20				5.0
FDIC insurance expense			235				248				(13	)			(5.2	)
Losses on sales and writedowns of other real estate			334				581				(247	)			(42.5	)
Other real estate owned expense			280				106				174				164.2
Directors’ fees			392				410				(18	)			(4.4	)
Communications expense			191				176				15				8.5
ATM maintenance expense			91				197				(106	)			(53.8	)
Merger-related expense			788				-				788				N/A
Other expense			1,505				1,663				(158	)			(9.5	)
Total non-interest expense		$	17,084			$	15,967			$	1,117				7.0	%

 

Income Tax Expense

 

Income tax expense was $845 thousand million and $1.2 million for the years ended December 31, 2018 and 2017, respectively. The decrease was due to the impact of The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The Act reduced the corporate tax rate to which the Company is subject. See Note 16 Income Taxes for a breakdown of current and deferred taxes and detail of the net deferred taxes at the end of both years.  

 

 

Loans

 

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

 

Loan Portfolio

 

		December 31,
(Dollars In Thousands)		2018				2017				2016				2015				2014
Construction:
Residential		$	17,232			$	15,221			$	10,204			$	11,779			$	10,019
Land acquisition, development & commercial			28,903				35,601				27,480				27,440				23,686
Real Estate:
Residential			143,385				121,649				111,626				100,268				86,269
Commercial			184,989				173,999				172,248				140,952				135,070
Commercial, industrial & agricultural			60,265				61,197				59,809				53,012				44,807
Equity lines			28,969				28,835				29,956				26,376				24,330
Consumer			7,719				7,693				7,668				7,531				7,498
Total loans		$	471,462			$	444,195			$	418,991			$	367,358			$	331,679

 

As with most community banks, the loan portfolio is concentrated in commercial real estate loans, and comprised 39.2% of the total loan portfolio at both December 31, 2018 and 2017. At December 31, 2018, there were no industry concentrations with outstanding balances representing 10% or more of total loans.

 

Maturities of Loans at December 31, 2018 are as follows:

 

(Dollars in Thousands)		Fixed Rate				Adjustable Rate				Total
Construction loans Maturing:
Within one year		$	9,036			$	12,290			$	21,326
One to five years			13,423				7,766				21,189
After five years			1,579				2,041				3,620
Total		$	24,038			$	22,097			$	46,135

 

 

(Dollars in Thousands)		Fixed Rate				Adjustable Rate				Total
Commercial loans Maturing:
Within one year		$	7,341			$	16,722			$	24,063
One to five years			19,828				12,969				32,797
After five years			1,885				1,520				3,405
Total		$	29,054			$	31,211			$	60,265

 

Provision and Allowance for Loan Losses

 

The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level to cover known and inherent risk of loss in the loan portfolio. Lower net charge offs during 2018 resulted in a provision for loan losses for the year of $561 thousand compared to $1.1 million in the previous year.

 

Net charge offs for 2017 totaled $327 thousand, compared to $1.0 million in 2017. Charge offs in 2017 included a partial charge off of $150 thousand for one loan. The loan had been current at the end of the quarter prior to the charge off. The remaining balance of $180 thousand was included in nonaccrual loans at December 31, 2017 and was in the process of foreclosure.

 

The allowance consists of three components: specific, general, and unallocated reserves. 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. The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries.

 

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.  Potentially impaired loans may include current “watch list” credits that are rated special mention, substandard, or doubtful with a total combined credit relationship in excess of $100 thousand. Management individually reviews these potentially impaired loans based on generally accepted accounting standards related to receivables and makes a determination if the loan is in fact 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 sell, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. The factors considered in recognizing a loan as impaired are detailed in Note 1 Significant Accounting Policies. Impaired loans totaled $5.1 million on December 31, 2018, a decrease of $0.2 million from the same period in 2017. Three loan relationships totaling $730 thousand were added to impaired loans in 2018. The property securing one relationship totaling $366 thousand was  foreclosed and moved to other real estate owned during 2018. The remaining change in the balance year over year was due to payments. The were no specific reserves related to impaired loans at year end 2018 or 2017.

 

 

The credit quality of the remaining portfolio remained strong, and was evaluated collectively to ensure the adequacy of the general reserves for loan losses. The general component of the reserve covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The adequacy of general reserves is determined by dividing the remaining loan portfolio into 30 homogenous pools, each with its unique degree of inherent risk and applying a loss factor to each pool of loans.  In determining the loss factor for each pool of homogenous loans the following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans and classified loans. From December 31, 2017 to December 31, 2018, the general component, including the unallocated component, increased $234 thousand. For the same period of time, the loans collectively evaluated rose $28 million to $466 million at the end of 2018.

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. It also reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. On a quarterly basis, management performs a detailed analysis of the allowance for loan losses to verify the adequacy and appropriateness of the allowance in meeting probable losses in the loan portfolio. The unallocated component was $79 thousand and $9 thousand at December 31, 2018 and 2017, respectively. See Note 4 for a more detailed breakdown of the allowance for loan losses.

 

The Company's total reserves amounted to $4.0 million or 0.85% of total loans at December 31, 2018, compared to $3.8 million or 0.85% of total loans at December 31, 2017 and reflects the credit quality of the underlying loan portfolio. Net charge-offs for 2018 were down significantly from the prior year.  Despite an increase in nonperforming loans, the level of total non-performing assets steadily declined as the economy improved. The “Loans by Credit Quality Indicators” tables in Note 4 Allowance for Loan Losses reveal a $868 thousand decrease in “Substandard Accruing” loans to $1.1 million at December 31, 2018, and a $9.9 million decrease in “Special Mention” loans to $3.1 million at year end 2018. Pass loans as a percent of total loans increased from 96.4% at December 31, 2017 to 98.9% at December 31, 2018. Past due and accruing loans decreased from 0.93% of total loans at December 31, 2017 to 0.58% at December 31, 2018.

 

Management considers economic information in determining the adequacy of the allowance for loan losses. According to the February 2019 FRB Snapshot report for Virginia, reports on the economy were somewhat mixed.  Payroll employment fell slightly; however, the unemployment rate remained low and house prices rose on a year-over-year basis.  Virginia issued 2,415 new residential permits in October 2018, down  27.0% from the prior month and down 18.1% from October 2017.  The Richmond MSA issued the most permits in October 2018 (486 permits) followed by Virginia Beach-Norfolk (436 permits).  Meanwhile, housing starts in Virginia totaled 26,300 in October 2018, down 30.0% from the prior month and 22.1% on a year-over-year basis.  Accordingly to CoreLogic Information Soloutions, Virginia home values depreciated 0.3% in November 2018 but appreciated 2.7% on a year-over year basis.  House prices decreased in the majority of Virginia MSAs in the month, but rose in every MSA except Danville on a year-over-year basis. Should the economy change, the Bank will look to adjust the factors in future quarter analysis.

 

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

 

Allowance for Loan Losses

 

(Dollars In Thousands)		2018				2017				2016				2015				2014
Balance, beginning		$	3,758			$	3,636			$	3,298			$	3,332			$	3,721
Provision charged to operating expense			561				1,142				1,082				−				−
Recoveries of amounts charged off			90				58				104				46				75
Loans charged off			(417	)			(1,078	)			(848	)			(80	)			(464	)
Balance, ending		$	3,992			$	3,758			$	3,636			$	3,298			$	3,332
Ratio of net charge-offs to average loans			0.07	%			0.24	%			0.19	%			0.01	%			0.12	%

 

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

 

 

December 31,
(Dollars in thousands)		2018								2017								2016								2015								2014
		Amount				% of Loans in Each Category to Total Loans				Amount				% of Loans in Each Category to Total Loans				Amount				% of Loans in Each Category to Total Loans				Amount				% of Loans in Each Category to Total Loans				Amount				% of Loans in Each Category to Total Loans
Construction:
Residential		$	111				3.7	%		$	94				3.4	%		$	63				3.2	%		$	83				3.0	%		$	43				2.3	%
Land acquisition, development & commercial			239				6.1				311				8.0				173				7.4				187				7.2				453				7.0
Real Estate:
Residential			1,082				30.4				955				27.4				866				27.3				1,047				26.0				833				24.5
Commercial			1,631				39.2				1,603				39.2				1,516				38.4				1,001				40.7				1,012				42.3
Commercial, industrial & agricultural			456				12.8				441				13.8				461				14.4				531				13.5				319				14.2
Equity lines			252				6.1				237				6.5				338				7.2				277				7.3				423				6.8
Consumer			142				1.7				108				1.7				97				2.1				85				2.3				65				2.9
Unallocated			79				—				9				—				122				—				87				—				184				—
Total allowance for loan losses		$	3,992				100.0	%		$	3,758				100.0	%		$	3,636				100.0	%		$	3,298				100.0	%		$	3,332				100.0	%

 

Investment Portfolio

 

At December 31, 2018, 2017 and 2016 all of the Company’s securities were classified as available-for-sale. The composition of the investment portfolio for the years ending December 31, 2018 and 2017 appear in Note 2 of this report. The following table presents the composition of the investment portfolio as of December 31, 2016.

 

 

(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

 

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

 

 

Securities Available for Sale, Maturity Distribution and Average Yields

 

 

		December 31, 2018
(Dollars in thousands)		Amortized Cost				Fair Value				Weighted Average Yield
U.S. government agency securities:
Maturing within 1 year		$	−			$	−				−	%
Maturing after 1 year and within 5 years			1,936				1,910				3.38
Maturing after 5 years and within 10 years			2,619				2,599				3.33
Maturing after 10 years			6,183				6,073				4.23
Mortgage backed securities and CMO’s:
Maturing within 1 year			−				−				−
Maturing after 1 year and within 5 years			376				369				4.50
Maturing after 5 years and within 10 years			2,230				2,177				3.01
Maturing after 10 years			16,919				16,383				3.16
Corporate securities:
Maturing within 1 year			−				−				−
Maturing after 1 year and within 5 years			−				−				−
Maturing after 5 years and within 10 years			6,641				6,439				4.63
Maturing after 10 years			−				−				−
Taxable municipal securities:
Maturing within 1 year			456				453				1.92
Maturing after 1 year and within 5 years			−				−				−
Maturing after 5 years and within 10 years			774				806				5.71
Maturing after 10 years			−				−				−
Nontaxable municipal securities:
Maturing within 1 year			−				−				−
Maturing after 1 year and within 5 years			−				−				−
Maturing after 5 years and within 10 years			1,456				1,458				3.22
Maturing after 10 years			6,413				6,309				4.25
Total Maturities		$	46,003			$	44,976				3.73	%

 

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

 

Deposits

 

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

 

Total deposits increased by $16 million or 3.3% from $477.3 million at December 31, 2017 to $493.2 million at December 31, 2018. The Company’s ability to attract and retain deposits, and our cost of funds, has been, and will continue to be significantly affected by market conditions. Core deposits increased by $20 million or 4.3% from $458 million at December 31, 2017 to $477 million at December 31, 2018. The regulators changed the definition of brokered deposits in 2018 to exclude customer reciprocal CDARs and ICS deposits.  Core deposits at December 31, 2017 was restated to include these deposits. 

 

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

 

 

		Average Deposits and Rates Paid December 31,
		2018								2017								2016
(Dollars in thousands)		Amount				Rate				Amount				Rate				Amount				Rate
Non-interest bearing deposits		$	115,623				−	%		$	107,072				−	%		$	85,846				−	%
Interest bearing accounts:
Checking			105,043				0.27				97,172				0.20				80,128				0.16
Money market savings			80,517				0.54				72,765				0.25				70,877				0.24
Regular savings			51,093				0.43				50,803				0.36				41,931				0.36
Time Deposits			130,022				1.47				139,792				1.23				149,969				1.18
Total Interest Bearing			366,675				0.77	%			360,532				0.63	%			342,905				0.65	%
Total		$	482,298							$	467,604							$	428,751

 

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

 

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

 

(Dollars in thousands)		Within 3 months				3 to 6 months				6 to 12 months				Over 1 year				Total				Percent of Total Deposits
At December 31, 2018		$	11,222			$	7,263			$	25,789			$	30,835			$	75,109				15.23	%

 

 

 Liquidity and Interest Rate Sensitivity

 

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

 

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

 

The Company’s asset-based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $57.9 million at December 31, 2018, compared to $65.2 million at December 31, 2017. Liquidity trended downward during 2018 as the securities available for sale paydowns were not reinvested due to unfavorable market conditions. The strategy of not reinvesting investment paydowns was further exacerbated by the impending merger. These funds were invested to satisfy loan demand.

 

The Company’s primary source of funding is its retail deposit base. The Company aggressively markets in its trade area and seeks demand deposits through service-related tactics and savings deposits through competitive pricing. 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 20% of our total assets from the FHLB subject to providing qualifying collateral.  At December 31, 2018, the Company had borrowed $7.9 million of the $20.9 million of lendable collateral value, leaving $12.9 million of unused credit immediately available. The Company also had $26.0 million of fed funds lines of credit available at the end of 2018. 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 but not less than 20 basis points. At December 31, 2018, $5.0 million of the $10.0 million ICS credit line was drawn down; there were no advances on the fed funds lines.   

 

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

 

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

 

Interest rate sensitivity at December 31, 2018 is summarized in the table below

 

			Interest Rate Sensitivity
Rate Shock			Net Interest Income (NII)				NII Change from Level
+400			$	20,960				4.86	%
+300				20,740				3.76	%
+200				20,501				2.56	%
+100				20,232				1.22	%
Level				19,988				-	%
-100				19,525				-2.32	%
-200				19,276				-3.56	%
-300				19,248				-3.71	%

 

 

The shifts in net interest income due to rate shocks are all within our policy limits. Recent growth in the loan portfolio has been in fixed rate products decreasing the impact of interest rate shocks on net interest income. Growth in a Prime based money market product has also decreased the asset sensitivity of the balance sheet. Net interest income continues to increase with increases in interest rates.

 

 

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

  

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

 

 

Interest Rate Sensitivity

 

(Dollars in thousands)		0 - 3 Months				3 - 12 Months				1 - 5 Years				Over 5 Years				Total
Interest Earning Assets
Securities		$	9,165			$	4,594			$	15,374			$	19,111			$	48,244
Interest-bearing deposits in other banks			7,439				—				—				—				7,439
Loans			132,503				56,759				228,476				53,724				471,462
Loans held for sale			85				—				—				—				85
Federal funds sold			194				—				—				—				194
Total		$	149,386			$	61,353			$	243,850			$	72,835			$	527,424
Cumulative totals		$	149,386			$	210,739			$	454,589			$	527,424
Interest Bearing Liabilities
Interest checking		$	107,003			$	—			$	—			$	—			$	107,003
Savings			45,543				—				—				—				45,543
Money market			99,104				—				—				—				99,104
Time deposits			18,500				52,889				52,243				347				123,979
FHLB borrowings			6,583				1,000				361				—				7,944
Subordinated notes			—				—				7,285				—				7,285
Other borrowings			201				—				—				—				201
Total			276,934				53,889				59,889				347				391,059
Cumulative totals			276,934				330,823				390,712				391,059
Interest sensitivity gap		$	(127,548	)		$	7,464			$	183,961			$	72,488			$	136,365
Cumulative interest sensitivity gap		$	(127,548	)		$	(120,084	)		$	63,877			$	136,365
Cumulative interest sensitivity gap to total interest earning assets			(24.18	%)			(22.77	%)			12.11	%			25.85	%

 

Capital Resources

 

To enable future growth of the Company, there must be an adequate level of capital. Management reviews the Company’s capital to ensure that the amount, composition and quality of the Company’s assets and liabilities satisfy regulatory requirements, meet or exceed industry standards, and support projected Company growth. The Company’s stock is traded on the NASDAQ Capital Market under the symbol “HMTA.”

 

At December 31, 2018 and December 31, 2017, the Company had stockholders’ equity of $53.7 million and $50.9 million, respectively, an increase of $2.8 million or 5.5%.

 

The ability to pay dividends to common stockholders is limited by regulatory restrictions and the need to maintain sufficient capital in the Company and in our subsidiaries. No cash dividends were paid to common stockholders prior to 2018. The Company declared and paid its first cash dividends to common shareholders in 2018. Dividends of $0.04 per common share were paid in each of the latter three quarters of 2018. On February 20, 2019 the Company declared a dividend of $0.04 per common share to be paid in the first quarter of 2019. The Company must consider different factors to ensure that any future dividends to common stockholders would be prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. The Company had $7.0 million in retained earnings at the end of 2018.

 

The Basel III capital framework represented 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 were complex and created 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 have required 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 may be forced to limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Company believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final Rules. However, increased capital requirements imposed by the Basel III Capital Rules may require the Company to limit its banking operations, retain net income to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations. See Note 18 for additional discussion of capital requirements.

  

 

The Company met the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The table presents the Bank’s capital amounts and ratios calculated using the Basel III rules in effect at December 31, 2018, and December 31, 2017.

 

Risk Based Capital Analysis

 

Capital Analysis

 

HomeTown Bank		December 31,
(Dollars in thousands)		2018				2017
Common Equity Tier 1 Capital:
Common Stock		$	14,697			$	14,697
Surplus			32,427				32,226
Retained Earnings			14,179				10,551
Common Equity Tier 1 Capital			61,303				57,474
Tier 1 Capital:
Tier 1 Minority Interest			2				25
Tier 1 Capital			61,305				57,499
Total Capital:
Allowance for Loan Losses (allowable portion)			3,992				3,758
Total Capital		$	65,297			$	61,257
Capital Ratios:
Total Capital to Risk-Weighted Assets			12.49	%			12.48	%
Tier 1 Common Equity to Risk-Weighted Assets			11.72	%			11.71	%
Tier 1 Capital to Risk-Weighted Assets			11.72	%			11.72	%
Tier 1 Capital to Average Assets			10.79	%			10.39	%

 

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

 

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

 

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

 

Note 17 provides additional detail regarding commitments at the end of 2018 and 2017. 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 violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Required.  

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

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

 

Financial Statements

 

Consolidated Balance Sheets, December 31, 2018 and 2017

 

Consolidated Statements of Income, Years Ended December 31, 2018 and 2017

 

Consolidated Statements of Comprehensive Income, Years Ended December 31, 2018 and 2017

 

Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2018 and 2017

 

Consolidated Statements of Cash Flows, Years Ended December 31, 2018 and 2017

 

Notes to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

 

 

HomeTown Bankshares Corporation

Consolidated Balance Sheets

December 31, 2018 and 2017

 

 

See Notes to Consolidated Financial Statements

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the years ended December 31, 2018 and 2017

 

 

See Notes to Consolidated Financial Statements

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2018 and 2017

 

 

See Notes to Consolidated Financial Statements

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended December 31, 2018 and 2017

 

Dollars in Thousands, Except Share and Per Share Data

 

 

See Notes to Consolidated Financial Statements

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the years ended December 31, 2018 and 2017

 

 

See Notes to Consolidated Financial Statements

 

 

HomeTown Bankshares Corporation

Notes to Consolidated Financial Statements

  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

HomeTown Bankshares Corporation

Roanoke, Virginia

  

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of HomeTown Bankshares Corporation and subsidiary (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Yount, Hyde & Barbour, P.C. 

 

We have served as the Company's auditor since 2005.

 

Roanoke, Virginia

March 15, 2019

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        

None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

   

Evaluation of Disclosure Controls and Procedures

 

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

 

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

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

 

Management assessed the effectiveness of HomeTown Bankshares’ internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in 2013. Based on this assessment, management believes that, as of December 31, 2018, HomeTown Bankshares’ internal control over financial reporting was effective.

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION

     

None.

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

      

The information required by this item relating to the Company’s directors and nominees is included under the captions “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Company’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.

 

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

 

 

The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.

 

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

 

The information required by this item relating to the Company’s Audit Committee is included under the captions “Item 1: Election of Directors,” “Audit Committee Matters” and “—Audit Committee Report” in the Company’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.

 

ITEM 11.

EXECUTIVE COMPENSATION.

       

The information required to be disclosed in this item 11 is included under the caption “Executive Compensation” of the Company’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.

 

ITEM 12.

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

         

The information required to be disclosed in this item 12 is relating to security ownership of certain beneficial owners and management is included under the caption “Common Stock Ownership” in the Company’s Proxy Statement for the 2019 Special Meeting of Shareholders and is incorporated herein by reference.

 

Equity Compensation Plans

 

The following table summarizes information concerning the Company’s equity compensation plans as of December 31, 2018.

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders			116,700	(2)		$	6.90				N/A	(3)
Equity compensation plans not approved by security holders			0				N/A				37,200	(4)

 

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

(2)	Represents options to purchase common stock outstanding under the 2005 Stock Option Plan. See Part II, Item 8, Note 13 for a detailed discussion of the Restricted Stock Plan.

(3)	The 2005 Stock Option Plan expired in 2016 and no shares are available for future issuance.

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

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

         

The information required by this item relating to review, approval or ratification of transactions with related persons is included under the caption “Certain Relationships and Related Transactions,” and the information required by this item relating to director independence is included under the caption “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Bank’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

        

The information required to be disclosed in this item 14 is included under the captions “Audit Committee Matters” and “Item III: Ratification of Independent Auditors” in the Company’s Proxy Statement for the 2019 Special Meeting of Stockholders and is incorporated herein by reference.  

 

 

PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

       

Financial Statements:

 

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Income for the Years Ended December 31, 2018 and 2017

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018 and 2017

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2018 and 2017

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017

Report of Independent Registered Public Accounting Firm

 

 

Exhibit Number
3.1	Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.
3.2	By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).
4.1	See Exhibit 3.1.
10.2*	Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.
10.3*	Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.
10.4	Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.
10.5	Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.
10.6*	Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2009.
10.7	Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.
10.8*	Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.
10.9*	Supplemental Executive Retirement Plan by and between Hometown Bank and Susan K. Still incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013.
10.10*	Supplemental Executive Retirement Plan by and between Hometown Bank and Vance W. Adkins, incorporated herein by reference to Exhibit 10.10 to Form 10-K for the year ended December 31, 2016.
10.11*	Employment Agreement (“Agreement”), made as of the 5th day of August, 2016, among HomeTown Bank, a Virginia Banking Corporation, HomeTown Bankshares Corporation, a Virginia incorporated registered bank holding company (collectively with HomeTown Bank, the “Employer”) and Vance Adkins (“Employee”), incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.
21	Subsidiaries of the Registrant
31.1	Certification of Chief Executive of Officer (302 Certification).

 

 

31.2	Certification of Chief Financial Officer (302 Certification).
32	Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).
101**	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2018 and 2017; (ii) Consolidated Statements of Income for the years ended December 31, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018 and 2017; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017; and (vi) Notes to Consolidated Financial Statements.

                              

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

  

ITEM  16.        FORM 10K SUMMARY.

 

None.

 

 

SIGNATURES

 

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

 

	HOMETOWN BANKSHARES CORPORATION
Date: March 15, 2019	By:	/S/    SUSAN K. STILL
		Susan K. Still President Chief Executive Officer

 

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

 

Signature		Title		Date
/S/    SUSAN K. STILL		Director, President, and		March 15, 2019
Susan K. Still		Chief Executive Officer (principal executive officer)
/S/    GEORGE B. CARTLEDGE, JR.		Director		March 15, 2019
George B. Cartledge, Jr.
/S/    NANCY H. AGEE		Director		March 15, 2019
Nancy H. Agee
/S/    WARNER N. DALHOUSE		Director		March 15, 2019
Warner N. Dalhouse
/S/    MARC S. FINK		Director		March 15, 2019
Marc S. Fink
/S/    DANIEL D. HAMRICK		Director		March 15, 2019
Daniel D. Hamrick
/S/    WILLIAM R. RAKES		Director		March 15, 2019
William R. Rakes
/S/    JAMES M. TURNER, JR.		Director		March 15, 2019
James M. Turner, Jr.
/S/    VANCE W ADKINS		Chief Financial Officer		March 15, 2019
Vance W. Adkins		(principal accounting and financial officer)

 

  

61