ITEM 1.
BUSINESS.
Overview and History
General
HomeTown Bankshares Corporation (the “Company”, “HomeTown Bankshares”) was incorporated in the Commonwealth of Virginia on December 8, 2008. On September 4, 2009, the Company acquired all of the outstanding shares of HomeTown Bank in a one for one exchange of stock.
The Company is authorized as a bank holding company. The holding company structure provides greater flexibility than a bank standing alone because it allows expansion and diversification of business activities through subsidiaries or through acquisitions. HomeTown Bankshares Corporation’s business is conducted through its wholly-owned subsidiary, HomeTown Bank.
HomeTown Bank
Hometown Bank (the “Bank”) is a Virginia banking corporation headquartered in Roanoke, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 2004 and began banking operations in November 2005. The Bank was organized to engage in general retail and commercial banking business.
The Bank opened for business on November 14, 2005 and was capitalized by more than 2,000 shareholders who wanted a new local bank dedicated to customer service. These investors provided the initial customer base and are integral to the success of the Bank. Management believes that the key to the Bank’s success lies in providing Bank customers with personalized service from experienced banking professionals while providing innovative, highly competitive and convenient products and services that meet their banking needs. In 2013 the Bank began operating a mortgage joint venture with another entity. The Bank’s ownership interest in HomeTown Residential Mortgage, LLC is 49%. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and larger companies. The Bank provides a full range of services to meet the financial needs of its customers and strives to provide its customers with innovative products while maintaining the prompt response and the high level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area. Management believes that the combination of local ownership and size allows the Bank to offer services and products specifically tailored to the needs of the community. The Bank’s Principal Office is located at 202 S. Jefferson Street, Roanoke, Virginia. The Bank maintains its primary website at www.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 Investments, opened in April 2013, provides diverse investment products and financial advisory services to existing and prospective customers. These products and services provide another source of revenue for the Company. Investment and insurance products and services are offered through an unaffiliated entity LPL Financial, Member FINRA/SIPC. HomeTown Investments is a subsidiary of the Bank. Products and services made available through LPL Financial are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value. Revenue from investment services is comprised mostly of fees based upon the market value of the accounts uder administration as well as commisions on inve
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 servce charges and fees from depost 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, 2016, the Company had 100 employees, including 99 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements, and relations with employees are considered positive.
Governmental Monetary Policies
The earnings and growth of the Company are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board implements national monetary policy by its open market operations in United States government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial institutions’ deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits. Management of the Company is unable to predict the effect of possible significant changes in monetary policies upon the future operating results of the Company.
Competition
The Company competes as a financial intermediary with other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Roanoke market area and elsewhere. Many of the Company’s nonbank competitors are not subject to the same extensive federal regulations that govern federally insured banks and state regulations governing state chartered banks. As a result, such nonbank competitors may have certain advantages over the Company in providing certain services.
Virginia law permits statewide branching by banks. Consequently, the Company’s market area is a highly competitive, highly branched banking market. Competition, for loans to individuals, small businesses, and professional concerns, is keen in the Company’s target market, and pricing is important. Most of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services, such as extensive and established branch networks and trust services that the Company is not currently providing. Moreover, larger institutions operating in the Roanoke market area have access to borrowed funds at a lower cost than are presently available to the Company. Deposit competition is strong and comes from institutions in the market, U.S. Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors, among other sources.
Cyber Security
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.
Supervision and Regulation
HomeTown Bankshares Corporation
HomeTown Bankshares is a bank holding company organized under the Federal Bank Holding Company Act of 1956 (“BHCA”), which is administered by the Federal Reserve Board. HomeTown Bankshares is required to file an annual report with the Federal Reserve Board and may be required to furnish additional information pursuant to the BHCA. The Federal Reserve Board is authorized to examine HomeTown Bankshares and its subsidiary.
The Bank Holding Company Act. Under the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve Board has found those activities to be incidental to banking. Bank holding companies also may not acquire more than 5% of the voting shares of any company engaged in nonbanking activities. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve Board before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares.
Virginia State Corporation Commission. All Virginia bank holding companies are required to register with the Virginia State Corporation Commission (the “Commission”). HomeTown Bankshares is required to report to the Commission with respect to financial condition, operations and management. The Commission may also make examinations of any bank holding company and its subsidiaries.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits significant combinations among different sectors of the financial services industry, allows for expansion of financial service activities by bank holding companies and offers financial privacy protections to consumers. GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. GLBA permits affiliations between banks and securities firms in the same holding company structure, and it permits financial holding companies to directly engage in a broad range of securities and merchant banking activities. HomeTown Bankshares is not a financial holding company.
The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (“SOX”) enacted sweeping reforms of the federal securities laws intended to protect investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including HomeTown Bankshares. SOX creates increased responsibilities for chief executive officers and chief financial officers with respect to the content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission rules focused increased scrutiny by internal and external auditors on HomeTown Bankshares’ systems of internal controls over financial reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and criminal penalties for violations of securities laws.
Capital Requirements. The Federal Reserve Board 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:
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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.
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Applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.
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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.
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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.
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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.
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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.
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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.
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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 will end on July 21, 2016. The Volcker Rule has been subject to much commentary from the banking industry and the Company continues to evaluate the impact the Rule will have on the industry and the Company in particular.
Safety and Soundness. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.
Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a limited partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.
Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions, including the filing of misleading or untimely reports with regulatory authorities, may provide the basis for enforcement action.
USA Patriot Act. The USA Patriot Act became effective on October 26, 2001, and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. Interim rules implementing the USA Patriot Act were issued effective March 4, 2002. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions.
Consumer Laws and Regulations. There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. HomeTown Bank is required to comply with these laws and regulations in its dealing with customers.
ACCESS TO FILINGS
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Also, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are posted on the Company’s website at http://www.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 31, 2017 and their areas of responsibility. The executive officer biographies follow the table.
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.
William C. Moses, has served as Executive Vice President and Chief Credit Officer of the Company since November 2005.
ITEM 1A.
ITEM 1A.
RISK FACTORS.
Not Required.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not Required.
ITEM 2.
ITEM 2.
PROPERTIES.
As of March 30, 2017, 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. The lease expires on July 31, 2016 and provides an option to extend the lease for two additional five-year periods.
The Christiansburg Office. The Bank purchased property at 2950 Market Street, Christiansburg on May 26, 2010. The Bank broke ground in December 2012 on a new 9,000 square foot branch. At the end of 2013 the Bank relocated their New River Valley branch operations and mortgage and administrative operations to the new building. The larger facility enables the Bank to meet the growing needs of its customers in the New River Valley and to attract new business. This office operates under the name “NewRiver Bank, a branch of HomeTown Bank”. The Bank began operations in the New River Valley market in 2008. The leases for the previous locations, at 1540 Roanoke Street and 1655 Roanoke Street, Christiansburg, expired in 2013.
Salem Office. The Bank purchased property at 852 West Main Street, Salem on September 2, 2011. A stand-alone fully operational ATM was completed and put into service April 15, 2013, and on July 28, 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.
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.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5.
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, 2016 to December 31, 2016, the selling price of shares of its common stock ranged from $8.70 to $10.40, and that approximately 458 thousand shares were traded. There may, however, have been other transactions at other prices not known to the Company.
As of March 30, 2017, there were 5,767,175 shares of the Company’s common stock outstanding, which shares were held by 1,928 shareholders of record. No cash dividends have been paid on the common stock to date.
Dividends
The Company is subject to certain restrictions imposed by the Federal Reserve Board and capital requirements of federal and Virginia banking statutes and regulations. The Company has never paid a cash dividend on its common stock. At December 31, 2016, the Company had retained earnings of $1.2 million. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not Required.
ITEM 7.
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:
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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;
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reliance on the Company’s management team, including its ability to attract and retain key personnel;
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interest rate fluctuations;
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maintaining capital levels adequate to support the Company’s growth;
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risk inherent in making loans such as repayment risks and fluctuating collateral values;
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the ability to attract low cost core deposits to fund asset growth;
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changes in laws and regulations applicable to us;
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changes in general economic and business conditions;
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competition within and from outside the banking industry;
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problems with our technology;
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changing trends in customer profiles and behavior; and
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new products and services in the banking industry.
Although the Company’s management believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of management’s knowledge of the Company’s business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Critical Accounting Policies
The financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements and management’s discussion and analysis are, to a large degree, dependent upon the Company’s accounting policies. The selection and application of these accounting policies involves judgments, estimates, and uncertainties that are susceptible to change.
Presented below is discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.
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 Esate 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, 2016 and 2015. This discussion should be read in connection with the Company’s Consolidated Financial Statements and the accompanying Notes thereto included in this Form 10-K.
The Company initiated its banking operations through the Bank, on November 14, 2005 with the opening of its main office at 202 S. Jefferson Street, Roanoke, Virginia. The Bank has experienced consistent growth over the last ten years.
The Business
HomeTown Bank provides a full complement of consumer and commercial banking services to its primary service area which includes the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Bedford, Franklin and Montgomery, Virginia. We place an emphasis on personal service and offer a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, residential and commercial mortgages, home equity loans, consumer installment loans, commercial loans, lines and letters of credit.
The Bank currently operates six full service branches, seven 24-hour ATM’s, and one mortgage office. In addition to its main office, the Bank has branch offices in Franklin County, Virginia at Westlake; in Roanoke County at the intersection of Colonial Avenue and Virginia Route 419; in Roanoke City on Franklin Road in South Roanoke, in Salem on West Main Street. The Bank operated under the name NewRiver Bank, a branch of HomeTown Bank in the New River Valley market, on Market Street in Christiansburg until the end of the first quarter of 2016. In a step to provide better brand recognition, the Bank began using the name HomeTown Bank throughout all its branch locations.
The Company operates in a highly competitive market for commercial banking and financial services as the Roanoke Valley is a banking and financial services hub for much of southwest Virginia.
Discussion of Results of Operations
Overview of Results of Operations
Net income attributable to HomeTown Bankshares Corporation for 2016 totaled $2.5 million and was $1.0 million less than the prior year. The unfavorable variance included a $606 thousand ($400 thousand after tax) specific provision related to one loan, the nonrecurring charge to write off the deferred tax asset related to expired stock options of $236 thousand in 2016, and the nonrecurring gain of $348 thousand ($230 thousand after tax) from the sale of a building in 2015. Organic balance sheet growth during 2016 resulted in total assets passing the half billion threshold at June 30, 2016, increasing to $517 million at the end of the year. The expansion of earning assets and core deposits positioned the Company to increase revenue from net interest income and noninterest deposit related fee income during 2016 and future years. The benefit of expansion was partially negated by competition, and gradually increasing interest rates pressuring the spread between loan yields and funding costs. Profitability was lowered by the recordation of a provision for loan losses of $1.1 million in 2016 to accommodate loan growth and included the specific loan loss provision of $606 thousand related to one loan. No provision for loan losses was booked in 2015. Losses and writedowns of other real estate owned for 2016 were $149 thousand more than 2015, as the portfolio of foreclosed properties continuced to decrease to $3.8 million at December 31, 2016 from $5.2 million on December 31, 2015 and a high of $10.1 million at the end of the third quarter of 2012.
Basic earnings per common share was $0.45 for 2016, and $0.79 for 2015; compared to the diluted earnings per common share of $0.37 and $0.62 for 2016 and 2015, respectively. In June 2016, the remaining 13,600 shares of Series C preferred stock were converted into 2,176,000 of common shares. The preferred shareholders received an additioanl 87,037 shares as the result of the 4% stock dividend. The impact on the basic earnings per share of the preferred share conversion was twofold. The conversion saved the Company the 6% dividend or $408 thousand that would have been paid to preferred shareholders during the second half of 2016. However, the conversion increased the weighted average common shares outstanding. The dilutive nature of the preferred shares was factored into the diluted earnings per common share calculation before the conversion. The diluted earnings per common share were less for 2016 than 2015 due to the decrease in net income available to common shareholders.
The following table is a schedule of the return on average assets and return on average equity for the dates indicated:
Summary of Financial Condition
Total assets eclipsed the half billion dollar threshold at the end of the second quarter of 2016 and totaled $ 517 million by year end. The net loan portfolio increased $51.3 million or 14.1% from the end of 2015 to December 31, 2016, and resulted in a $37.9 million or 7.9% increase in total assets during the period. The growth of total deposits increased 12.8% year over year and slightly surpassed the dollar increase in loans. Cash at the end of 2015 was inflated by the $7.2 million net cash proceeds from the issuance of subordinated notes on December 18, 2015. From December 31, 2015 to December 31, 2016, cash decreased $10.5 million or 36.6%. The proceeds from the debt issuance and liquidity provided from core deposit growth funded the expansion of the loan portfolio and provided the opportunity to reduce Federal Home Loan Bank (FHLB) borrowings and reliance on brokered deposits during 2016.
Commercial real estate and residential real estate accounted for 60.6% and 22.0% of the total $51.6 million increase in gross loans, respectively.
Securities available for sale were $53.0 million and $52.5 million at the end of 2016 and 2015, 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) increased $1.2 million during the year ended December 31, 2016 to $7.5 million at the end of the year. BOLI is the funding mechanism for the Supplemental Retirement Plan (SERP) provided to executive management. The retirement of the Company’s former Chief Financial Officer and the promotion of an individual to succeed him resulted in the expansion of the number of individuals covered by the SERP. The benefit was funded by purchasing $1.0 million of additional BOLI. 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, 2016 were $469 million, compared to $433 million at the end of 2015, an increase of $36.1 million or 8.3%. Total deposits are the primary component of total liabilities which were $451 million at December 31, 2016.
Stockholders’ equity was $48.2 million at December 31, 2016, $1.8 million or 4.0% above the $46.4 million at the end of the previous year. Net income available to common stockholders of $2.1 million, net of the $1.3 million 4% stock dividend raised the level of retained earnings $804 thousand to $1.2 million at December 31, 2016 compared to $443 thousand at December 31, 2015. 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:
The five year trend of non-performing assets reflects continued improvement in the economy from the economic crisis which began in 2008. Nonperforming assets, including restructured loans were 2.10% of total assets at the end of 2016, compared to 2.52% at the end of 2015 and 3.34% at the end of 2014.
Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and unsecured consumer loans are designated as non-accrual when payment is delinquent 90 days or at the point which the Company considers collection doubtful, if earlier. Consumer mortgage loans and most other types of consumer loans past due 90 days or more may remain on accrual status if management determines that concern over our ability to collect principal and interest is not significant. When loans are placed in non-accrual status, previously accrued and unpaid interest is reversed against interest income in the current period and interest is subsequently recognized only to the extent cash is received and if principal repayment is probable. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. 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.
The level of nonperforming loans at December 31, 2016 was higher than the level at December 31, 2015, due to the addition of one credit of $577 thousand. This credit was also classified as impaired in 2016, and as such was evaluated individually for the need for the inclusion of a specific reserve in the allowance for loan losses. The collateral for this credit consisted of developed building lots. Based on the review at the end of 2016, the collateral value was deemed sufficient and no specific reserve necessary. The remaining three nonperforming loans were also classified as impaired at December 31, 2016. One of the loans had a specific reserve of $17 thousand at December 31, 2016.
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.
Other real estate owned decreased $1.4 million during 2016 to $3.8 million at December 31, 2016. Sales of other real estate reduced the total $1.5 million during the year, and included one property recorded at $1.3 million that had been held for almost two years. Two properties totaling $481 thousand were added during 2016. The largest was an independent church, whose membership voted to disband in the first quarter of 2016. Their action prompted the Bank to negotiate a deed-in-lieu of foreclosure which added $473 thousand to the balance of other real estate owned. Writedowns of other real estate owned included two properties and totaled $405 thousand. One of the properties written down $305 thousand was sold after year end 2016 and reduced other real estate owned $599 thousand in January 2017.
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 2016 compared to 2015.
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 2016, net interest income totaled $16.2 million; an increase of $766 thousand or 5.0% over the $15.4 million earned in the previous year. The expansion of the loan portfolio continued to be the driving force underlying increases in net interest income. For the year ended December 31, 2016, average gross loans totaled $391 million and were $39.9 million or 11.4% higher than the average of $351 million for 2015. The growth of deposits as well as the funds provided from the subordinated note issuance in December 2015 funded the expansion of loans, additions to the investment portfolio, and the reduction of FHLB borrowings during 2016. Total average deposits increased $48.9 million in 2016 compared to 2015. Average FHLB borrowings were $14.2 million for 2016, $11.0 million less than the average for the prior year.
The increased volume of loans provided $1.7 million additional interest income in 2016, partially offset by the cost of the subordinated debt, and lower loan yields. The subordinated notes were issued in December 2015 and were only outstanding for 13 days in 2015; resulting in their cost being $19 thousand in 2015 compared to $536 thousand in 2016.
The net interest margin was 3.55% for the year 2016 compared to 3.79% for the previous year. The cost of the subordinated notes accounted for 11 basis points of the 24 basis points drop year over year. Similarly the subordinated debt accounted for 13 basis points of the 31 basis points decline in the net interest spread for 2016 compared to 2015. The benefit of higher average non-interest bearing deposits mitigated the decline in the margin compared to the decline in the spread.
Loan yields declined 13 basis points to 4.53% during 2016. Increased liquidity in the markets fostered competition among commercial banks and other financial services industries to satisfy growing loan demand. Competition exerting downward pressure on rates in the market-place coupled with maturing seasoned loans at higher interest rates contributed to lower loan yields. Excess funds from increased liquidity were placed in interest bearing bank accounts until needed to fund further loan growth and the expansion of the investment portfolio. Average interest bearing deposits with banks were $8.7 million greater for the year 2016 than for the year 2015. Earnings were maximized overall by depositing excess funds in interest bearing versus non-interest bearing accounts with other banks. However, since they are relatively low yielding, as their respective portion of total earning assets increased, it put a drag on the overall yield of earning assets. The average interest bearing deposits for 2016 totaled $343 million, an increase of $25.0 million over the average for 2015. Management expects rates paid on deposits products will rise in 2017. The more volatile non-interest bearing deposits averaged $23.9 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) at its March 15, 2017 meeting raised the target range for the federal funds rate 25 basis points to 1.00 percent. This marked the first time the FOMC had felt the economy was strong enough to handle two rate hikes in a three-month span since 2006. The FOMC noted that that inflation had recently increased close to its 2% target although core inflation was little changed and still slightly below the target. The FOMC viewed the labor market as continuing to strengthen and economic activity continuing to expand at a modest pace. Per their statement, “Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat.”
The Company expects the Federal Reserve to continue to raise rates in a gradual and measured manner. The FOMC’s Summary of Economic Projections, the median projection for where fed funds will end 2017 and 2018 was unchanged while the 2019 median projection rose from 2.88% to 3.00%. Management expects the combination of lower loan yields and possibly higher deposit costs in the future to further compress the net interest margin in 2017. The weighted average maturity of the fixed rate portion of the loan portfolio increased from forty-four months at December 31, 2015 to fifty-three months at December 31, 2016.
The following table illustrates average balances of total interest-earning assets and total interest bearing liabilities for 2016, 2015 and 2014, 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
(1) Yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.
Rate and Volume Analysis
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 $130 thousand or 4.4% for the year 2016 compared to the prior year. Included in 2015’s earnings was a $348 thousand net gain from the sale of a building that was adjacent to a branch that the Company had previously leased to an unrelated third party. Increases in service charges on deposit accounts of $146 thousand or 27.9% and ATM and interchange income of $95 thousand or 16.5% were the result of the expansion of the core deposit base by $57.1 million or 16.1% to $413 million at December 31, 2016. Mortgage banking income for 2016 was $151 thousand or 21.5% greater than the prior year, and reflects the increase in the number of loan originations through the mortgage subsidiary. The number of residential units sold in the Roanoke Valley rose by 358 units or 7.6% to 5,046 for 2016 according to the Roanoke Valley Association of Realtors. During this time frame the average home price increased 0.7%. For 2017, the Mortgage Bankers Association (MBA) has projected that total originations will decrease and then increase slightly in 2018 as a growing purchase market is offset by more declines in refinance activity as rates rise. In their February 21, 2017 “MBA Forecast Commentary”, they projected the 30 year mortgage rate will be 4.7% by the end of 2017, and reach 5.5% by mid-2018. The Company invested $1.0 million in bank owned life insurance for an additional key executive who replaced a retiring officer which contributed to more noninterest income in 2016 than the prior year. Merchant processing income for 2016 was $51 thousand more than the prior year due to the increase in the number of customers. The $69 thousand decline in other income was the result of lost revenue in 2016 from the tenant of the building the Bank sold at a gain of $348 thousand in 2015.
Non-Interest Income
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 $1.0 million or 7.6%, to $14.2 million for 2016. 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 2016 were $7.0 million compared to $6.5 million for the prior year. The $452 thousand or 6.9% increase was due to several factors. Unfilled open positions in the prior year, and new positions to accommodate growth, as well as annual merit raises contributed to the increase. The numbers of full time equivalent employees were 99 and 94 at December 31, 2016 and 2015, respectively. The Bank took advantage of the opportunity to hire two former Valley Bank employees at the beginning of 2016 and expand a Private Banking division that has contributed to loan and deposit growth. The expense for the Supplemental Retirement Plan for certain key officers was more in 2016 than the previous year due to updates to the underlying assumptions and the retirement of one of the covered executive officers. The improved financial performance of mortgage banking resulted in higher commissions and other incentive pay. Higher wages were partially offset by the deferral of more loan origination costs, in accordance with ASC 310-20 due to a higher volume of new loans and renewals.
Occupancy and equipment expense totaled $1.7 million for the year ended December 31, 2016, $24 thousand or 1.4% less than the prior year. The prior year included rent expense for space at the main branch previously occupied by the Bank’s operations personnel. The relocation of staff to the Operations Center began in December 2014 and was completed in the first quarter of 2015.
Discretionary spending on advertising and marketing for 2016 varied favorably by $211 thousand or 30.5% with the prior year. During 2015, a North Carolina bank acquired Valley Bank, making HomeTown Bank the only community bank headquartered in the Roanoke Valley. The Company aggressively marketed to its customer base to increase market share through the consummation of the merger on July 1, 2015.
Professional fees were $108 thousand or 28% more for 2016 compared to 2015 due to higher investor related costs of and conversion of the remaining preferred stock to common shares at the end of June 2016, and the stock dividend distributed on July 11, 2016. As the result of an internal promotion, the position of Senior Risk Officer became open in August 2016 and remained unfilled through March 30, 2017. Additional professional fees were incurred from the engagement of an external consulting firm in the last quarter of 2016 to complete the 2016 internal audit plan. Their work is expected to continue through the first half of 2017.
Data processing expense for 2016 was $94 thousand or 11.0% more than 2015. The increase reflected additional processing costs incurred from the expansion of the core deposit customer base.
Bank Franchise Tax was $104 thousand or 39.7% more for 2016 than last year. The increase in the Bank’s equity from retained earnings, the capital infusion of $6.0 million from the proceeds of the subordinated notes issued at the end of 2015, and the reduction in real estate taxes paid on foreclosed properties, which are deducted from capital on the Bank Franchise return, were all factors contributing to the increase in the Bank Franchise Tax in 2016.
Losses on sales and writedowns of other real estate were $149 thousand more in 2016 than 2015. One property on the books for $1.3 million was sold for a loss of $91 thousand after being held by the bank for almost two years. December 2016 included $4054 thousand of writedowns on two foreclosed properties. A warehouse in Salem was foreclosed on in April 2011 for $1.2 million. Foundation issues precipitated a write-down of $261 thousand in December 2015. An offer was made for the warehouse at the end of 2016, and the property was written down an additional $304 thousand to $599 thousand. The sale was completed in January 2017 with no further loss. An unfinished housing development, also foreclosed in 2011, was written down $100 thousand in December 2016 in anticipation of solidifying a deal to sell the vacant lots in 2017.
The Board of Directors fees were raised in 2016 in recognition of the Company’s growth in asset size and were $189 thousand more for 2016 compared to the prior year.
Other expenses were $1.5 million in 2016 compared to $1.3 million in 2015. Other expense includes compliance costs, office supplies and printing costs, and a sundry of other fees and expenses. Fees related to the Company’s NASDAQ listing accounted for $53 thousand of the increase. Much of the remaining increase included appraisal fees, recording fees, and other costs incurred in relation to the expansion of the loan portfolio.
Non-Interest Expense
Income Tax Expense
Income tax expense was $1.4 million and $1.6 million for the years ended December 31, 2016 and 2015, respectively. The decrease was due to lower earnings, partially offset by the tax impact of expired incentive stock options. The Company incurred additional tax expense of $236 thousand due to the expiration of stock options in the second quarter that were issued in 2006 and were never exercised. This charge was due to the reversal of tax benefits recorded previously that could not be realized due to the expiring options. 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
As with most community banks, the loan portfolio is concentrated in commercial real estate loans, and comprised 41.1% and 38.4% of the total loan portfolio at December 31, 2016 and 2015, respectively. At December 31, 2016, there were no industry concentrations with outstanding balances representing 10% or more of total loans.
Maturities of Loans at December 31, 2016 are as follows:
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. Higher net charge offs during 2016 and loan growth resulted in a provision for loan losses for the year of $1.1 million compared to none in the previous year 2015.
Net charge offs for 2016 totaled $744 thousand, and included a partial charge off of $606 thousand for one loan. The loan had been current at the end of the quarter prior to the charge off. The borrowers lost their hotel franchise rights and were no longer able to make payments. Proceeds from the sale of the underlying collateral paid off the remaining balance of the loan without the Bank incurring any additional loss. For 2015, net charge offs were $34 thousand.
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 esttimated 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 $7.3 million on December 31, 2016, a decrease of $561 thousand from the same day in 2015. One of the impaired credits with a balance of $2.2 million on December 31, 2016 paid off early in January 2017. During the year 2016, one borrower with three impaired credits totaling $871 thousand on December 31, 2015 was upgraded and is no longer classified as impaired. As discussed previously in “Nonperforming Assets”, one $577 thousand credit was added to impaired loans in 2016. The remaining change in the balance year over year was due to payments. The specific reserves related to impaired loans were $17 thousand at year end 2016 and 2015, and were related to the same nonaccruing credit that made $12 thousand in payments during 2016.
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, 2015 to December 31, 2016, the general component, including the unallocated component, increased $338 thousand. For the same period of time, the loans collectively evaluated rose $52 million to $412 million at the end of 2016.
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 $122 thousand and $87 thousand at December 31, 2016 and 2015, respectively. See Note 4 for a more detailed breakdown of the allowance for loan losses.
The Company's total reserves amounted to $3.6 million or 0.87% of total loans at December 31, 2016, compared to $3.3 million or 0.90% of total loans at December 31, 2015 and reflects the credit quality of the underlying loan portfolio. As discussed in “Non-performing Assets,” despite an increase in nonperforming loans, the level of total non-performing assets steadily declined as the economy improved. Further the “Loans by Credit Quality Indicators” tables in Note 4 Allowance for Loan Losses reveal a $314 thousand decrease in “Substandard Accruing” loans to $1.3 million at December 31, 2016, and a $6.5 million decrease in “Special Mention” loans to $78 thousand. Pass loans as a percent of total loans rose from 97.7% at December 31, 2015 to 99.4% at December 31, 2016. Similarly past due and accruing loans were $1.2 million or 0.29% of total loans at December 31, 2016 down from $1.4 million or 0.39% one year earlier. Qualitative factors were positively impacted by the purchase of new comprehensive loan pricing software, which had the added benefit of enhancing underwriting.
Management considers economic information in determining the adequacy of the allowance for loan losses. At the February 1, 2017 meeting, the Federal Open Market Committee noted that the labor market had continued to strengthen and the economy continued to expand at a modest pace. The local markets are largely shielded from national events and trends, but do tend to realize lagging effects in subsequent quarters. The Federal Reserve Bank of Richmond’s March 2017 Snapshot reported payroll employment expanded by 165,300 or 0.73% for the Roanoke MSA, while Blacksburg’s MSA contracted 79,000 or 0.63% from the end of 2015 to the end of 2016. Overall vacancy in the office market remains high at 9.7%, while year-to-date office absorption remains negative compared to last year. The higher vacancy and negative absorption numbers are attributed to the former Norfolk & Southern building in Downtown Roanoke and the former Allstate building in Southwest Roanoke, both single-tenant buildings vacated in 2015-2016. The former Norfolk & Southern Building is now owned by local investors who plan to reposition the property as a multi-tenant, Class A office building. Management did not adjust the qualitative factors for national and local economic conditions in 2016. 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
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.
Investment Portfolio
At December 31, 2016, 2015 and 2014 all of the Company’s securities were classified as available-for-sale. The composition of the investment portfolio for the years ending December 31, 2016 and 2015 appear in Note 2 of this report. The following table presents the composition of the investment portfolio as of December 31, 2014.
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
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 $51.3 million or 12.8% from $400 million at December 31, 2015 to $451 million at December 31, 2016. 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. Brokered deposits decreased $5.6 million, while core deposits increased $57.1 million from the end of 2015 to December 31, 2016.
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
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
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 $59.2 million at December 31, 2016, compared to $73.0 million at December 31, 2015. To provide a more stable source of liquidity, at the end of the fourth quarter 2015, the Company issued $7.5 million in subordinated notes. Liquidity trended downward during 2016 as the funds from the debt issuance were invested in earning assets, reduced debt and reliance on brokered deposits, and were utilized in other ways to contribute to overall profitability.
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 25% of our total assets from the FHLB subject to providing qualifying collateral. At December 31, 2016, the Company had borrowed $8.0 million of the $29.0 million of lendable collateral value, leaving $21.0 million of unused credit immediately available. The Company also had $36.5 million of fed funds lines of credit available at the end of 2016. 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, 2016, there were no advances on the fed funds or credit 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, 2016 is summarized in the table below
The shifts in net interest income due to rate shocks are all within our policy limits. The floors on the equity lines and the business lines of credit keep the rates on these loans from increasing until rates increase high enough to exceed the floors. These restrictions combined with the fact that rates on deposits begin to increase as rates increase, result in a small increase in net interest income with rate shocks of 100. Change in net interest income increases with the 200 basis point shock, and further increases at the 300 and 400 basis point shocks.
The primary objective of our asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. The goal is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.
Management strives to control the exposure to interest rate volatility and operates under policies and guidelines established by the Board of Directors, who set the level of acceptable risk, by understanding, reviewing and making decisions based on 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
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, 2016 and December 31, 2015, the Company had stockholders’ equity of $48.2 million and $46.4 million, respectively, an increase of $1.8 million or 4.0%. The remaining preferred shares were converted to common stock in June, 2016 eliminating the dividend of 6% per year in future quarters. Each share of Series C preferred stock converted into 166.4 shares of common stock, which was comprised of the conversion factor of 160 plus the benefit of the 4% stock dividend of 6.4 additional shares. The total number of share added from the conversion, including the benefit of the stock dividend was 2,263,037.
The 4% common stock dividend declared by the Board of Directors on May 10, 2016 to common shareholders of record June 9, 2016 was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177 to a total of 5,763,944 on July 11, 2016. The stock dividend shifted $1.3 million from retained earnings to common stock and surplus. 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 in 2016. 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 $1.2 million in retained earnings at the end of 2016.
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, 2016, and December 31, 2015.
Risk Based Capital Analysis
Capital Analysis
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 2016 and 2015. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Required.
ITEM 8.
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, 2016 and 2015
Consolidated Statements of Income, Years Ended December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income, Years Ended December 31, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows, Years Ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
HomeTown Bankshares Corporation
Consolidated Balance Sheets
December 31, 2016 and 2015
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Income
For the years ended December 31, 2016 and 2015
*Restated for the 4% stock dividend distributed July 11, 2016
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2016 and 2015
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2016 and 2015
Dollars in Thousands
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and 2015
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
Organization
On September 4, 2009, HomeTown Bankshares Corporation (the “Company”) acquired all outstanding stock of HomeTown Bank (the “Bank”) in an exchange for shares of the Company on a one-for-one basis to become a single-bank holding company with the Bank becoming a wholly-owned subsidiary. The Bank was organized and incorporated under the laws of the State of Virginia on November 9, 2004 and commenced operations on November 14, 2005. The Bank currently serves Roanoke City, Virginia; the County of Roanoke, Virginia; the City of Salem, Virginia; Christiansburg, Virginia; and surrounding areas. As a state chartered bank, which is a member of the Federal Reserve System, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Board.
In 2013 the Bank formed a joint venture with another entity and now has a 49% ownership interest in HomeTown Residential Mortgage, LLC. The consolidated financial statements of HomeTown Bankshares Corporation include the accounts of its wholly-owned subsidiary HomeTown Bank and the accounts of its subsidiary, HomeTown Residential Mortgage LLC. HomeTown Residential Mortgage LLC originates and sells mortgages secured by personal residences. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Summary of Significant Accounting Policies
The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of HomeTown Bankshares Corporation and its wholly-owned subsidiary HomeTown Bank. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the valuation of deferred tax assets. Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate (as applicable) is susceptible to changes in local market conditions.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from correspondent banks. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated balance sheet caption “cash and due from banks.”
Securities
Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently, all of the Company’s investment securities are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Restricted Equity Securities
As members of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB), the Company is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.
Loans Held for Sale
Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past-due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.
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Residential real estate construction loans carry risks that the home will not be finished according to schedule, will not be finished according to the budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
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Land acquisition and development loans and commercial construction loans carry risks that the project will not be finished according to schedule, will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer, in the case of land acquisition and development loans, or the general contractor, in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.
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Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.
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Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.
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Commercial, industrial and agricultural loans carry risks associated with the successful operation of a business. Typically repayment is dependent on the cash flow of the business, and is secured by business assets, such as accounts receivable, equipment, and inventory. There is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.
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Equity lines of credit carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.
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Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.
TDRs (Troubled Debt Restructurings) occur when the Company agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past-due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on a record of making payments as scheduled for a period of six consecutive months.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are charged off when they become 120 days past due. Non-consumer loans are charged off when the loan becomes 180 days past due unless the loan is well secured and in the process of collection. Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:
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Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
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Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
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Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Company’s credit extension. The payment history for the loan may have been inconsistent, and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Company. There is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Company will be unable to collect all amounts due.
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Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification and are considered impaired.
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Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
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Loss rated loans are not considered collectible under normal circumstances, and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
Loan Fees and Costs
Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.
Property and Equipment
Land is carried at cost. Buildings, equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Estimated useful lives range from ten to forty years for buildings and leasehold improvements, and from three to ten years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance are included in the income statement in the line “Losses on sales and writedowns of other real estate owned, net.”
Bank Owned Life Insurance
The Company purchased seven life insurance policies on certain key executives. These policies are recorded at their cash surrender value. Increases in the cash surrender value of the life insurance contracts are included in noninterest income in the consolidated income statement caption “other income.”
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.
Advertising Expense
The Company expenses advertising and marketing costs as they are incurred.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statement of income. There are no unrecognized tax benefits as of December 31, 2016 and 2015.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. Potential common shares that may be issued by the Company relate to the outstanding stock options. The remaining convertible preferred stock outstanding was converted to common shares on June 29, 2016. The preferred stock was convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment for stock splits and dividends. The potential dilutive effect of the outstanding stock options is determined using the treasury stock method.
Comprehensive Income
Comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense. These changes for the Company relate solely to unrealized gains and losses on securities available for sale.
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Stock-Based Compensation Plan
The 2005 Stock Option Plan was approved by stockholders on April 20, 2006, which authorized 550,000 shares of common stock to be used in the granting of incentive options to employees and directors. This plan expired in 2016. Under the plan, the option price could not be less than the fair market value of the stock on the date granted. An option’s maximum term was ten years from the date of grant. Options granted under the plan were subject to a vesting schedule.
The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost was measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
In 2009, the Board of Directors authorized 137,280 (adjusted for 4% stock dividend in 2016) shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five-year period and compensation expense is charged to income ratably over the vesting period. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company elected early adoption of ASU 2016-09 in the second quarter of 2016.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
Note 2. Investment Securities
Amortized cost and fair value of securities available for sale are as follows:
The primary purpose of the investment portfolio is to generate income, diversify earning assets, and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio is made up primarily of fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business or entity behind the instrument. The primary cause of unrealized losses is the increase in market interest rates over the yields available at the time the securities were purchased.
At December 31, 2016, the Company does not consider any security in an unrealized loss position to be other-than-temporarily impaired.
U.S. Government agency securities. The unrealized losses on twenty-one of the Company’s investments in obligations of the U.S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016.
Mortgage-backed securities and CMO’s. The unrealized losses on thirty-two of the Company’s investments in government-sponsored entity mortgage-backed securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016.
Corporate securities. The unrealized loss on one of the Company’s investments in corporate securities was caused by increases in market interest rates over the yield available at the time the security was purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2016.
Municipal securities. The unrealized losses on nineteen of the Company’s investments in obligations of municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates and credit spreads, and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016.
The following tables demonstrate the unrealized loss position of securities available for sale at December 31, 2016 and 2015.
The amortized cost and estimated fair value of securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to prepay obligations with or without call or prepayment penalties.
Proceeds from the sales, maturities and calls of securities available for sale in 2016 and 2015 were $14.4 million and $10.8 million, respectively. The Company realized $257 thousand in net gains on sales of fourteen available for sale securities in 2016, compared to $52 thousand from the sales of six securities in the prior year. The net gain in 2016 included gross gains of $262 thousand net of gross losses of $5 thousand. The prior year included gross gains of $67 thousand and gross losses of $15 thousand. Total pledged securities had a fair market value of $6.2 million at December 31, 2016 and $7.4 million at December 31, 2015. At December 31, 2016, securities having a fair market value of $3.7 million were pledged to secure public deposits, securities pledged to secure Federal Home Loan Bank borrowings totaled $1.0 million, and $1.5 million in securities were pledged for other purposes.
Note 3. Loans Receivable
The major classifications of loans in the consolidated balance sheets at December 31, 2016 and 2015 were as follows:
The past-due and nonaccrual status of loans as of December 31, 2016 was as follows:
The past-due and nonaccrual status of loans as of December 31, 2015 was as follows:
There were two loans, totaling $4 thousand that were past due ninety days or more and still accruing interest at December 31, 2016. There were two loans totaling $842 thousand that were past due ninety days or more and still accruing interest at December 31, 2015.
Impaired loans, which include TDRs of $6.4 million, and the related allowance at December 31, 2016, were as follows:
Impaired loans, which include TDRs of $6.7 million, and the related allowance at December 31, 2015, were as follows:
Troubled Debt Restructurings
At December 31, 2016, five loans totaling $6.4 million were classified as troubled debt restructurings (“TDRs”). Three of the five loans totaling $6.2 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2016. The other two loans from one borrower totaled $231 thousand and were on nonaccrual status at year end 2016. All five TDRs were current with their restructured terms at December 31, 2016.
At December 31, 2015, six loans totaling $6.7 million were classified as troubled debt restructurings. Four of the six loans totaling $6.4 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2015. The other two nonaccrual loans, totaling $252 thousand, were originally one loan from one borrower that was restructured into two TDRs during the prior year 2015. The loan restructured into two TDRs during the year ended December 31, 2015 was included in substandard nonaccrual loans and impaired loans at the end of 2014. All six TDRs were current with their restructured terms at December 31, 2015.
There was no valuation allowance related to total TDRs at December 31, 2016, or December 31, 2015.
No loans were modified in a TDR during the year ended December 31, 2016.
The following table presents by class of loan, information related to the loan modified into two TDRs during the year ended December 31, 2015:
Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, the specific reserve associated with the loan may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.
Note 4. Allowance for Loan Losses
The following table presents, as of December 31, 2016, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
The following table presents, as of December 31, 2015, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
Loans by credit quality indicators as of December 31, 2016 were as follows:
At December 31, 2016, the Company does not have any loans classified as Doubtful or Loss.
Loans by credit quality indicators as of December 31, 2015 were as follows:
At December 31, 2015, the Company does not have any loans classified as Doubtful or Loss.
Note 5. Other Real Estate Owned
Changes in other real estate owned for 2016 were as follows:
Changes in other real estate owned for 2015 were as follows:
The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2016 and December 31, 2015 were as follows:
Other real estate owned related expenses in the consolidated statements of income for the years ended December 31, 2016 and December 31, 2015 include:
Note 6. Property and Equipment
The major components of property and equipment at December 31, 2016 and 2015 were as follows:
Depreciation and amortization expense was $754 thousand and $762 thousand for the years ended December 31, 2016 and 2015, respectively.
Leases
The Company currently leases its main office under a non-cancelable lease agreement. The lease has a ten-year term and expires on December 31, 2025. The agreement provides an option to extend the lease for one additional ten-year term at expiration. Terms of the new agreement provide for an annual rental increase, beginning January 1, 2017, based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. The Company currently leases a branch location under a non-cancelable lease agreement. The original lease expired on July 31, 2016. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for two additional, consecutive five-year terms. The newly negotiated lease expires July 31, 2026. The Company currently leases space to operate an automated teller machine under a non-cancelable lease agreement. The term of the eight year lease commenced on April 1, 2013 and expires on April 1, 2021. The lease provides an option to extend the term for two additional five-year periods. Terms of the agreement provide for an annual rental increase of three percent over the rent for the immediately preceding lease year. HomeTown Residential Mortgage, LLC leases space in Roanoke and Christiansburg for its mortgage operations. Both leases are for a term of twelve months and renew under the same terms unless 60 days’ notice is provided by the lessor or the Company. The Roanoke lease expires every May 31 and the Christiansburg lease expires every September 30.
The current minimum annual lease payments under non-cancelable leases in effect at December 31, 2016 were as follows:
Rent expense for the years ended December 31, 2016 and 2015 was $307 thousand and $333 thousand, respectively, and is included in occupancy and equipment expense on the Company’s consolidated statements of income. The following table breaks down rent expense for the years ended 2016 and 2015:
Note 7. Deposits
The aggregate amount of time deposits in denominations of over two hundred and fifty thousand dollars at December 31, 2016 and 2015 were $9.8 million and $10.0 million, respectively.
At December 31, 2016, the scheduled maturities of time deposits are as follows:
The Company obtains certain deposits through the efforts of third-party deposit brokers. At December 31, 2016 and 2015, brokered deposits totaled $28.5 million and $34.2 million, respectively, and were included in interest-bearing deposits on the consolidated balance sheets. There were no deposit relationships over 5% of total deposits at the end of 2016.
Note 8. Federal Home Loan Bank Borrowings
The Company has outstanding debt with the Federal Home Loan Bank of Atlanta in the amount of $8.0 million and $22.0 million as of December 31, 2016 and 2015, respectively. The Federal Home Loan Bank debt at December 31, 2016 is comprised of two fixed rate advances totaling $8.0 million.
At December 31, 2016 and 2015, borrowings from the Federal Home Loan Bank of Atlanta were as follows:
The Company had collateral pledged on these borrowings at December 31, 2016, including real estate loans totaling $28.0 million, investment securities totaling $1.0 million, and Federal Home Loan Bank stock with a book value of $814 thousand.
Note 9. Subordinated Notes
On December 18, 2015, the Company completed the issuance of $7.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various institutional accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of December 30, 2025 and have an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes will have a floating interest rate based on LIBOR. Interest will be paid semi-annually, in arrears, on June 30 and December 30 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date.
For the years ended December 31, 2016 and 2015, the average effective interest rate was 7.44% and 6.89%, respectively.
The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company’s payments to general and secured creditors and depositors of its wholly owned subsidiary, HomeTown Bank.
The notes are redeemable, without penalty, on or after December 30, 2020 and, in certain limited circumstances, prior to that date.
The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is not “well capitalized” for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.
Note 10. Other Borrowings
Other borrowings consist of the following at December 31, 2016 and 2015:
Securities sold under agreements to repurchase are secured transactions with customers and generally mature the day following the day sold. Short-term borrowings may also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions. The warehouse line of credit is a short-term revolving credit facility used to fund mortgage loans originations until the underlying loan is sold. The amount borrowed on the $5.0 million warehouse line of credit was $665 thousand at year end 2016 at a rate of LIBOR plus 2.75%. The Company had $36.5 million of federal funds lines of credit available at year-end 2016. 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, 2016 and 2015, there were no advances on the federal funds or credit lines.
Note 11. Fair Value Measurements
The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 - Valuation is based on observable inputs, including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 - Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:
Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015:
Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:
Impaired Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and a specific reserve is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the extent of any loss. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraisal value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the Bank’s consolidated joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.
Other Real Estate Owned (OREO): The carrying amount of real estate owned by the Company resulting from foreclosures is estimated at the lesser of cost or the fair value of the real estate based on an observable market price or a current appraised value less selling costs. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the real estate is further impaired below the appraised value or there is no observable market price, the Company records the real estate as nonrecurring Level 3.
The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2016 and 2015.
At December 31, 2016 and December 31, 2015, the Company did not have any liabilities measured at fair value on a nonrecurring basis.
The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2016:
The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2015:
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts reported in the consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of contractual maturities on such time deposits.
Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. Management believes the carrying value of federal funds sold approximates estimated market value.
Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).
Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.
Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.
Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Bank owned life insurance: The cash values of these policies are estimates using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of contractual maturities on such time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 30 days approximate their fair values.
FHLB borrowings: The fair values for FHLB borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings to the contractual maturities on such FHLB borrowings.
Subordinated notes: The fair values is measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).
Accrued interest: The carrying amount of accrued interest receivable and payable approximates fair value.
Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At December 31, 2016 and 2015, the fair value of loan commitments and standby letters of credit was deemed to be immaterial.
The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2016:
The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2015:
Note 12. Earnings per Common Share
The following tables show the weighted average number of shares used in computing earnings per common share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders for the year ended December 31, 2016, as all of the Series C Preferred Stock was converted to common stock during the year. For the year ended December 31, 2015, the impact of dilutive Series C Preferred Stock was the dividend paid to the preferred shareholders.
* Restated for the 4% stock dividend distributed July 11, 2016.
At December 31, 2016 and 2015, the number of stock options considered antidilutive and excluded from the calculation of diluted weighted average shares was 190,531 and 546,460, restpectively. Non-vested restricted shares were included in weighted average common shares outstanding for computing basic earnings per share, as the holder has voting rights and would share in dividends during the vesting period.
Note 13. Stock Based Compensation
The Company recorded stock based compensation expense of $147 thousand and $137 thousand for the years ended December 31, 2016 and 2015, respectively.
The 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors granted stock options to directors, officers and employees expired in 2016, thus there are no options available for future isuance. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost was measured at the grant date based on the fair value of the award and was and continues to be recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company used the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards was affected by the price of the Company's stock and a number of financial assumptions and variables. These variables included the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. No stock options were granted during 2016 or 2015. Compensation expense is charged to income ratably over the vesting period and was $75 thousand in 2016 and 2015. As of December 31, 2016, there was $211 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next three years. At the discretion of the Board of Directors, the stock option plan was not modified for the 4% stock dividend distributed on July 11, 2016
A summary of option activity under the 2005 stock option plan during the year ended December 31, 2016 is as follows:
(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2016.
In 2009, the Board of Directors authorized 137,280* shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five-year period and compensation expense is charged to income ratably over the vesting period and was $72 thousand in 2016 and $62 thousand in 2015. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The weighted-average grant date fair value of restricted stock granted in 2016 was $9.09* compared to $7.60* in 2015. The Company granted 11,149* and 11,404* shares of restricted stock under the plan in 2016 and 2015, respectively.
As of December 31, 2016, there was $165 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2021. A summary of the activity for restricted stock awards for the periods indicated is presented below:
* Restated for the 4% stock dividend distributed July 11, 2016.
Note 14. Salary Continuation Plan
The Company has a Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income. The Supplemental Executive Retirement Plan (the “SERP”) provides lifetime payments equal to 20% of a participant’s average annual base salary for the five years immediately prior to retirement. There is an incentive formula with an additional benefit of 20% of a participant’s average annual base salary for the five years immediately prior to retirement if performance targets set by the Board of Directors are met. The SERP contains provisions for disability and survivor benefits, a benefits vesting schedule based on age attained and automatic full vesting in the event of a change in control of the Company. During 2016, the SERP was increased to provide for the individual who filled the position of Chief Financial Officer (CFO), upon the former CFO’s retirement. During the previous year 2015, the SERP was expanded to include all executive managers. Accrued deferred compensation expense under the SERP, included in other liabilities, totaled $666 thousand and $315 thousand at the end of 2016 and 2015, respectively. Compensation expense related to the SERP was $351 thousand for 2016 compared to $186 for 2015. The funding mechanism for the plan is Bank Owned Life Insurance policies on the lives of the participants.
Note 15. Employee Benefit Plan
The Company adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. The Company makes non-discretionary matching contributions of 100% of the employee’s deferral up to 3% of compensation and matches 50% of the employee’s next 3% deferral. In addition, the Company may make additional contributions at the discretion of the Board of Directors. The Company’s matching contributions were $240 thousand and $209 thousand for the years ended December 31, 2016 and 2015, respectively.
Note 16. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2013.
The current and deferred components of income tax expense for the periods ended December 31, 2016 and 2015 are as follows:
Rate Reconciliation
Total income tax expense differed from the “expected” amount computed by applying the U.S. Federal income tax rate of 34 percent to income before income taxes as a result of the following.
Deferred Income Tax Analysis
The significant components of net deferred taxes at December 31, 2016 and 2015 are summarized as follows:
Note 17. Commitments and Contingencies
Litigation
In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
Credit Related Financial Instruments
The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheet.
The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
A summary of the Company’s commitments at December 31, 2016 and 2015 is as follows (dollars in thousands):
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
The Company is required to maintain certain required reserve balances with the Federal Reserve Bank. At December 31, 2016 and 2015, these reserve balances amounted to $6.6 million and $3.9 million, respectively.
The Company from time to time may have cash and cash equivalents on deposit with financial institutions that exceed federally insured limits. Balances in excess of FDIC insured amounts totaled $7.2 million and $3.8 million at December 31, 2016 and 2015, respectively.
Purchase Obligation
On November 1, 2015, the Company entered into a three year marketing agreement involving naming, advertising, and sponsorship rights. This agreement was amended effective July 1, 2016. The new term was for five years, and expanded the exclusivity of marketing rights and increased signage. In relation to these agreement, the Company expensed $57.5 thousand and $47.8 thousand in 2016 and 2015, respectively. The agreement obligates the Company to pay $65.0 thousand in 2017 and 2018, $66.0 thousand in 2019, $68.0 thousand in 2020 and $34.5 thousand for the first half of 2021, for these rights.
Note 18. Regulatory Restrictions
Dividends
The Company, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any company when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Company. At December 31, 2016, there were $1.2 million in retained earnings available from which to pay dividends to common stockholders. No cash dividends were paid to common stockholders in 2016 or 2015. A stock dividend was distributed in 2016 and is discussed in Note 20 Capital Transactions.
Capital Requirements
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in January 1, 2019. As part of the new requirements, the Common Equity Tier 1 Capital is calculated and utilized in the assessment of capital for all institutions. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2016 and 2015, the most recent regulatory notifications categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. In July 2013, the Federal Reserve Bank issued revised final rules that make technical changes to its market risk capital rules to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act.
The new rules introduced 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 final new capital rules required the Company to comply with the following new minimum capital ratios (including the capital conservation buffer), effective January 1, 2016 and 2015, respectively: (1) a new common equity Tier 1 capital ratio of 5.125% and 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.625% and 6% of risk-weighted assets; (3) a total capital ratio of 8.625% and 8% of risk-weighted assets; and (4) a leverage ratio of 4% of total assets.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I common equity, and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the applicable regulations. As of December 31, 2016, management believes the Bank met all capital adequacy requirements to which it was subject.
The Bank’s actual capital amounts and ratios are also presented in the following tables:
Note 19. Transactions with Related Parties
The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
Aggregate loan transactions with related parties were as follows:
Repayments of loans to related parties include $575 thousand in loans removed from related party disclosure due to a change in directorship in 2016.
Aggregate deposit balances with related parties at December 31, 2016 and 2015 were $16.7 million and $16.3 million, respectively.
Note 20. Capital Transactions
The Board of Directors declared a 4% common stock dividend on May 10, 2016 to holders of record June 9, 2016. The stock dividend was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177.
On June 28, 2013, HomeTown Bankshares Corporation completed a $14,000,000 private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated April 17, 2013 and amended thereafter, the Company sold 14,000 shares of its 6.0% Series C Non-Cumulative Perpetual Convertible Preferred Stock at a price of $1,000 per share. The convertible preferred stock paid quarterly dividends equivalent to six percent (6.0%) per annum, and was convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment. The Company paid $408 thousand and $840 thousand in dividends on Series C preferred stock in 2016 and 2015, respectively. For the year 2015, 400 shares of preferred stock were converted to 64,000 shares of common stock. The remaining 13,600 shares of preferred stock were converted to 2,176,000 shares of commons stock on June 29, 2016. The preferred shareholders were entitled to the 4% stock dividend declared by the Board of Directors on May 10, 2016 and received an additional 87,037 shares of common stock.
Note 21. Reclassifications Out of Other Comprehensive Income
Items not reclassified in their entirety to net income for the years ended December 31, 2016 and 2015 are as follows:
Note 22. Condensed Parent Company Financial Information
Financial information pertaining only to HomeTown Bankshares Corporation follows.
Note 23. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date of this filing, and there were no reportable subsequent events.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
HomeTown Bankshares Corporation
Roanoke, Virginia
We have audited the accompanying consolidated balance sheets of HomeTown Bankshares Corporation and subsidiary (the ®€œCompany®€) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company®€™s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HomeTown Bankshares Corporation and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Roanoke, Virginia
March 30, 2017
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
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, 2016. 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, 2016, 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, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
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 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
The information required by this item relating to the Bank’s executive officers is included under the caption “Executive Officers of the Registrant” in Part I of this report.
The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its directors and executive officers, including its Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is posted to the Investor Relations section of the Company’s website at www.hometownbank.com. In addition, a copy of the Code of Ethics may be obtained without charge by written request to the Company’s corporate secretary.
The information required by this item relating to the Company’s Audit Committee is included under the captions “Item 1: Election of Directors,” “Audit Committee Matters” and “-Audit Committee Report” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11.
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 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
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 2017 Annual Meeting of Shareholders and is incorporated herein by reference.
Equity Compensation Plans
The following table summarizes information concerning the Company’s equity compensation plans as of December 31, 2016.
(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.
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 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14.
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 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements:
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015
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*
HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.4
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, 2010.
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.
10.11* Employee Agreement dated August 5, 2016 among HomeTown Bank, HomeTown Bankshares Corporation, and Vance W. Adkins
Subsidiaries of the Registrant
31.1
Certification of Chief Executive of Officer (302 Certification).
31.2
Certification of Chief Financial Officer (302 Certification).
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, 2016, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2016 and 2015; (ii) Consolidated Statements of Income for the years ended December 31, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, and 2015; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015; 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ SUSAN K. STILL
Director, President, and
March 30, 2017
Susan K. Still
Chief Executive Officer
(principal executive officer)
/S/ GEORGE B. CARTLEDGE, JR.
Director
March 30, 2017
George B. Cartledge, Jr.
/S/ NANCY H. AGEE
Director
March 30, 2017
Nancy H. Agee
/S/ WARNER N. DALHOUSE
Director
March 30, 2017
Warner N. Dalhouse
/S/ MARC S. FINK
Director
March 30, 2017
Marc S. Fink
/S/ DANIEL D. HAMRICK
Director
March 30, 2017
Daniel D. Hamrick
/S/ WILLIAM R. RAKES
Director
March 30, 2017
William R. Rakes
/S/ JAMES M. TURNER, JR.
Director
March 30, 2017
James M. Turner, Jr.
/S/ VANCE W ADKINS
Chief Financial Officer
March 30, 2017
Vance W. Adkins
(principal accounting and financial officer)
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.
3.2
By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).
4.1
See Exhibit 3.1.
10.2*
Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.
10.3*
HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.4
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, 2010.
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.
10.11* Employee Agreement dated Augist 5, 2016 among HomeTown Bank, HomeTown Bankshares Corporation, and Vance W. Adkins
Subsidiaries of the Registrant [Exhibit 21 attached]
31.1
Certification of Chief Executive of Officer (302 Certification).
31.2
Certification of Chief Financial Officer (302 Certification).
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, 2016, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2016 and 2015; (ii) Consolidated Statements of Income for the years ended December 31, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, and 2015; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements.
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Denotes management contract or compensatory plan or arrangement.
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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.