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.
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 also maintains a website at www.hometownbankva.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. The Bank currently conducts business from five full-service offices. Three of the full-service offices are located in Roanoke, Virginia, one full-service location is in the Westlake area of Franklin County, Virginia and one full-service location is in Christiansburg, Virginia. The Christiansburg market is also served by a loan production office.
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.
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, as a representative for mortgage companies, originates consumer residential mortgage loans. Loans originated are conforming and non-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 Department are pre-sold to major national mortgage banking or financial institutions and at no time are carried on the Bank’s balance sheet. In addition to creating customer relationships and the opportunity to sell other products and services, the bank receives fee income for this service.
Other Services. Other services offered by the Bank include safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, automatic drafts for various accounts, overdraft protection, check cards, credit cards and merchant card services. The Bank also has become associated with a shared network of automated teller machines (ATMs) that may be used by Bank customers throughout the world. The Bank intends to introduce new products and services as permitted by the regulatory authorities or desired by the public. The Bank remains committed to meeting the challenges that require technology. The Bank provides its customers with access to the latest technological products, such as internet banking, including on-line bill pay and mobile banking. The services allow customers to handle routine transactions using the internet at the Bank’s website www.hometownbankva.com or on their mobile phones.
Market Area
The Bank’s market area primarily consists of the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Bedford, Franklin and Montgomery, Virginia. Total population in the market area equals approximately 400,000. The area is serviced by one daily newspaper, at least 6 weekly, multi-weekly or bi-weekly newspapers and a number of radio and television stations providing diverse media outlets. The City of Roanoke and Roanoke County, the location of three of the Bank’s offices, has the largest population base, with approximately 190,000 persons. The Roanoke market area is diversified by industry groups with services, retail trade, manufacturing, construction, transportation and utilities, finance, insurance and real estate. Roanoke is a regional center for banking, medicine and the legal and business professional community. Carilion Clinic, Veterans Affairs, Kroger, and HCA Virginia Health System are among Roanoke’s largest private employers. Other major employers are the local school boards, municipal governments, and universities including Virginia Tech, Roanoke College, and Hollins University.
Employees
As of December 31, 2012, the Company had 84 employees, including 78 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 in the market area for loans to individuals, small businesses, and professional concerns, the Company’s target market, is keen, 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.
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.
On September 18, 2009, as part of the Capital Purchase Program (CPP) established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company entered into a Purchase Agreement with Treasury pursuant to which the Company issued and sold to Treasury 10,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and a warrant to purchase up to 374 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”). This warrant was exercised immediately. Cumulative dividends on the Series A Preferred Stock accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. Cumulative dividends on the Series B Preferred Stock accrue on the liquidation preference at a rate of 9% per annum.
Under the CPP, the Company and its Named Executive Officers amended certain employment agreements and benefit plans and arrangements to the extent necessary to be in compliance with the executive compensation and corporate governance requirements of Section 111(b) of the EESA as implemented by any guidance or regulation under Section 111(b) of EESA that was issued and in effect as of the closing date of the transaction. Section 7001 of the American Recovery and Reinvestment Act of 2009 (“ARRA”) amends Section 111 of EESA to provide that participants in the CPP are subject to the standards established by the Secretary of the Treasury, and directs the Secretary of the Treasury to require each CPP recipient to meet appropriate standards for executive compensation and corporate governance. On June 15, 2009, the Treasury issued an interim final rule, Trouble Asset Relief Program (TARP) Standards For Compensation and Corporate Governance, to provide guidance on the executive compensation and corporate governance provisions of the EESA as amended by the ARRA.
In the fourth quarter of 2012, The U. S. Department of the Treasury sold all of its interest in the Series A and B Preferred Stock and the Company is no longer a participant in the Capital Purchase Program and is no longer subject to its requirements.
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’s systems of internal controls over financial reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and criminal penalties for violations of securities laws.
Capital Requirements. The Federal Reserve Board has adopted risk-based capital guidelines that are applicable to HomeTown Bankshares. The guidelines provide that the Company must maintain a minimum ratio of 8% of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit). At least half of total capital must be comprised of Tier 1 capital, for a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines of 4% for banks that meet certain specified criteria. The leverage ratio is the ratio of Tier 1 capital to total average assets, less intangibles. HomeTown Bankshares is expected to be a source of capital strength for its subsidiary bank, and regulators can undertake a number of enforcement actions against HomeTown Bankshares if its subsidiary bank becomes undercapitalized. HomeTown Bankshares’s 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.
Emergency Economic Stabilization Act of 2008. On October 14, 2008, the U. S. Treasury announced the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008. Under the program, the Treasury was authorized to purchase up to $250 billion of senior preferred shares in qualifying U.S. banks, savings and loan associations, and bank and savings and loan holding companies. The amount of TARP funds was later increased to $350 billion.
American Recovery and Reinvestment Act of 2009. The ARRA was enacted in 2009 and includes a wide range of programs to stimulate economic recovery. In addition, it also imposed new executive compensation and corporate governance obligations on TARP Capital Purchase Program recipients. Because HomeTown Bankshares participated in TARP it must comply with these requirements.
The Dodd-Frank Act
The financial regulatory reform legislation “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) was signed into law on July 21, 2010. The Dodd-Frank Act implements financial regulatory reform across the entire financial landscape and has far-reaching provisions including among other things:
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Create 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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Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.
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Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund and increase the floor of the size of the Deposit Insurance Fund.
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Require 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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Implement 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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Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provide unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions.
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Repeal 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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Amend 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. 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, to offset demands on the DIF from banks that fail in the troubled economy and 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 and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. The unlimited deposit insurance on non-interest bearing transactions accounts expired on December 31, 2012 and has not been renewed or reinstated.
The FDIC announced its Transaction Account Guarantee Program on October 14, 2008. The Transaction Account Guarantee Program, which is a part of the Temporary Liquidity Guarantee Program, provides full coverage for non-interest bearing deposit accounts for FDIC-insured institutions that elected to participate. HomeTown Bank elected to participate in this program, and its DIF assessments have increased to reflect the additional FDIC coverage. After giving primary regulators an opportunity to first take action, FDIC may initiate an enforcement action against any depository institution it determines is engaging in unsafe or unsound actions or which is in an unsound condition, and the FDIC may terminate that institution’s deposit insurance.
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.
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. Although it does create a reporting obligation, the Company does not expect the USA Patriot Act to materially affect its products, services or other business activities.
Consumer Laws and Regulations. There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. HomeTown Bank is required to comply with these laws and regulations in its dealing with customers.
ACCESS TO FILINGS
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Also, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are posted on the Company’s website at http://www.hometownbankva.com as soon as reasonably practical after filing electronically with the SEC.
Executive Officers of the Registrant
The following table shows the Company’s executive officers as of March 20, 2013 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.
Charles W. Maness, Jr., has served as Executive Vice President and Chief Financial Officer of the Company since May 2006.
William C. Moses, has served as Executive Vice President and Chief Credit Officer of the Company since November 2005.
Terrance E. O’Shaughnessy., has served as Executive Vice President and Chief Lending Officer of the Company since June 2008 and previously served as a commercial lender for the Company since June 2007.
Lauire C. Hart, has served as Executive Vice President and Chief Retail and Deposit Officer of the Company since November 2008 and previously served Senior Vice President and Deposit Officer since November 2007.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Not Required.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Required.
ITEM 2.
ITEM 2. PROPERTIES.
As of March 20, 2013, 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 1540 Roanoke Street, Christiansburg, Virginia (the “Christiansburg Office”) and vi) a loan production and administrative office at 1655 Roanoke Street, Christiansburg, Virginia.
The Downtown Office. The Bank leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia. The lease is for a period of 10 years, 11 months from January 31, 2005 with options to renew the lease for two periods of five years. 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.
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 lease is for a period of five years from August 1, 2006 with options to renew for two periods of five years.
The Christiansburg Office. The Bank leased real property and improvements thereto located at 1540 Roanoke Street, Christiansburg, Virginia on April 30, 2008 and received regulatory approval and opened a branch at this location on June 19, 2008. This office operates under the name “NewRiver Bank, a branch of HomeTown Bank”. The lease is for a term of five years from April 30, 2008 with a five year renewal option.
The Christiansburg Loan Production and Administrative Office. The Bank leases real property and improvements thereto located at 1655 Roanoke Street, Christiansburg, Virginia. This office is for loan production purposes and also provides administrative support for our New River Valley operations. The lease is for a term of five years from April 30, 2008 with a five year renewal option.
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, are neither listed on any stock exchange nor quoted on the Over the Counter Bulletin Board and trade infrequently. Shares of the Company’s common stock have periodically been sold in a limited number of privately negotiated transactions. Based on available information, the Company believes that from January 1, 2012 to December 31, 2012, the selling price of shares of its common stock ranged from $3.60 to $5.90. There may, however, have been other transactions at other prices not known to the Company.
As of March 20, 2012, there were 3,262,518 shares of the Company’s common stock outstanding, which shares were held by 1,880 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. In addition, a significant portion of the revenues of the Company result from dividends paid to it by the Bank, and there are various legal limitations applicable to the payment of dividends by the Bank to the Company. On October 31, 2012, the Company's $10 million of Series A Preferred Stock and $374 thousand Series B Preferred Stock was sold by the Treasury as part of its efforts to manage and recover its investments under the TARP. While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients. The Company has never paid a cash dividend on its common stock and has no present plans to do so.
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 involve judgments, estimates, and uncertainties that are susceptible to change.
Presented below is discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.
Management monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. Management maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.
Management evaluates various loans individually for impairment. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. 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 grouped by similar characteristics, including the type of loan, the assigned loan classification and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. Management recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.
General
Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the financial condition and results of operations of the Company and the Bank as of and for the years ending December 31, 2012 and 2011. 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 seven 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 five deposit offices, one loan production office, 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 July 2008, the Bank opened two offices in Christiansburg, Virginia, a branch office and a loan production and administrative support office for operations in the New River Valley market. These two offices operate under the name NewRiver Bank, a branch of HomeTown Bank. In December 2012, the Company broke ground on a new branch in Christiansburg to meet the growing needs of its customers in the New River Valley. The Company expects to move all of its New River operations from their current locations to the new location by the end of 2013. In February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office. The mortgage office operates under the name HomeTown Mortgage and coordinates the bank’s existing mortgage services and offers mortgages, refinancing, home-construction loans, home-equity loans and other services. The Bank expects to have a fully operational ATM in service in Salem by the end of the first quarter of 2013, and to begin construction of a new branch there by the end of the current year.
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
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 certificates of deposit and federal funds sold. Interest bearing liabilities include deposits and borrowings.
The Company grew rapidly during its first five full years of operations through 2010. In 2011, due to declining loan demand and a desire to maintain a strong capital position, growth was moderated resulting in a $15 million decrease in the loan portfolio offset by a $17.6 million increase in the securities portfolio. Improvement in economic conditions in 2012 resulted in increased lending activity in our markets and the Company was able to increase total loans by $26 million. With interest rates reaching historically low levels in 2012, the Company funded $16 million of loan growth from reductions in federal funds sold and available for sale securities. This shift contributed to the improvement in the Company’s net interest margin in 2012 compared to 2011.
In addition to asset sources of liquidity, the Company has available $17.5 million of federal funds lines of credit and $11.7 million in Federal Home Loan Bank lines of credit immediately available. The Company is approved to borrow 20% of total assets from the Federal Home Loan Bank provided qualifying collateral is pledged.
Overview of Results of Operations
The Company recorded net income available to common shareholders of $4.0 million or $1.22 per basic and diluted share for the year ended 2012, compared to $1.3 million or $.41 per basic and diluted share for the year ended December 31, 2011. The recognition of prior year and current year deferred tax assets in 2012 added an income tax benefit of $2.1 million or $.64 per share to pre-tax profits. Pre-tax profits were $2.5 million for 2012, up $604 thousand from the $1.9 million of pre-tax earnings in 2011. Improved net interest income fueled primarily by an increase in the net interest margin was the major contributor to higher pre-tax earnings in 2012 compared to 2011.
Summary of Financial Condition
Total assets at December 31, 2012 were $370.5 million; an increase of $9.3 million or 2.6%, from $361.2 at December 31, 2011.
As the economy continued to show signs of improving in 2012, loan demand grew, and loans, net of allowance for loan losses, increased $26.0 million or 10.6% from the end of 2011 to the end of 2012. Loans were funded primarily by a reduction in liquid assets in 2012. Cash and due from banks decreased $2.7 million and fed funds sold decreased $10.2 million from December 31, 2011 to December 31, 2012.
Securities available-for-sale decreased $5.7 million or 8.3% to $63.5 million at December 31, 2012 from $69.2 million at December 31, 2011. During 2012, in response to decreasing yields in the bond markets, the Company shifted from growing the securities portfolio to using it as a means to fund loan growth.
The Company, based on the increased likelihood of being able to realize the benefit of reducing future taxable income by the amount of prior year net operating loss carry forwards and other timing differences, recognized a net deferred tax asset in the first quarter of 2012. At December 31, 2012, net deferred tax assets were $1.3 million compared to none in the prior year.
Total liabilities at December 31, 2012 were $333.7 million, an increase of $5.6 million, or 1.7%, from $328.1 million at December 31, 2011. Total deposits, the primary component of total liabilities, were $310.0 million at December 31, 2012, an increase of $2.4 million or .8%, from $307.6 million as of December 31, 2011.
Total stockholders’ equity amounted to $36.7 million at December 31, 2012 compared to $33.1 million at December 31, 2011. Management believes the Company has sufficient capital to fund its operations while the Company strives to generate profits on a consistent basis, but there can be no assurance that this will be the case.
At December 31, 2012, the Company was in compliance with all regulatory capital requirements. Management believes that the Company has sufficient liquidity on a short-term basis to meet any funding needs it may have, and expects that its long term liquidity needs can be achieved through deposit growth, however there can be no assurance that such growth will develop.
Non-performing Assets
Following is a breakdown of our nonperforming loans by assets type:
Loan quality began stabilizing in 2011 and continued during 2012. Non-performing assets consist of loans past-due ninety days or more and still accruing interest, non-accrual loans and repossessed and foreclosed assets. The Company had $11.6 million in non-performing assets at December 31, 2012 and at December 31, 2011. The Company had no loans past-due ninety days or more and still accruing interest at the end of 2012 or 2011. The aggressive pursuit of troubled loans and foreclosed properties resulted in non-accrual loans rising $657 thousand during 2012 to $2.7 million at the end of the year; while other real estate owned decreased $624 thousand to a total of $8.9 million at December 31, 2012.
The $2.7 million of non-accruing loans at December 31, 2012 included $2.3 million of new loans added to non-accruing status during the year, and $401 thousand of residual balances on loans that were classified as non-accruing at the end of the prior year. Of the $2.0 million of non-accrual loans at the end of 2011, $901 thousand were subsequently charged off during 2012, another $661 thousand were paid off during 2012, and $69 thousand were foreclosed during the year. All non-accruing loans at the end of 2012 and $2.0 million at the end of 2011were included in impaired loans. 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.
See also Note 5 of the Notes to Consolidated Financial Statements for information on changes in other real estate and for the major classifications of other real estate for 2012 compared to 2011. Additions to other real estate owned totaled $1.7 million for 2012, down $6.0 million from the prior year total of $7.7 million.
Allowance for Loan Losses
The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. The relationship between the provision and the allowance is discussed in more depth under Provision and Allowance for Loan Losses.
Net Interest Income and Net Interest Margin
Net interest income, the primary source of the Company’s earnings, is the excess of interest income, derived from earning assets classified as loans, securities, and federal funds sold, over and above interest expense, which are amounts due from the Company’s interest bearing liabilities including customer deposits, time certificates, other borrowings and FHLB advances. 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, but usually to a lesser extent. 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 average interest rates and average volumes of interest earning assets and interest bearing liabilities.
Net interest income increased $1.2 million or 10.3% to $12.9 million in 2012, from $11.7 million in 2011, while the net interest margin rose 34 basis points to 3.82% for 2012 compared to 3.48% for the prior year. An increase in non-interest-bearing deposits for the twelve months ended December 31, 2012, accompanied by steady reduction in funding costs throughout the year, were the primary contributors to the improved net interest margin. The interest rate spread between earning assets and interest bearing liabilities was widened by lowering rates paid on interest bearing deposits to be more consistent with market rates and more in line with the lower rates on loans in the current low interest rate environment.
Interest rates are expected to remain at the current low levels through 2015. Management will continue to promote the growth of non-interest bearing deposits; however management does not anticipate the same level of improvement in the net interest margin that occurred in 2012 to be repeated in 2013. Already at historically low rates, management does not anticipate much room for any significant further reductions in rates paid on interest bearing deposits. Maturing time deposits will continue to reprice at lower rates in 2012 but to a lesser extent than 2011. Some runoff of time deposits is expected to continue with some customers moving monies to other deposit products or into other non-bank investment products. During 2012, management increased the utilization of attractively priced brokered deposits as a funding source. At December 31, 2012 and 2011, brokered deposits totaled $35.9 million and $23.5 million, respectively, and are included in interest-bearing time deposits.
An increase of $1.9 million or .55% in the volume of average earning assets to $337 million for 2012 added an additional $296 thousand to interest income. The mix of earning assets was more favorable in 2012 than the prior year, as funds were shifted from lower yielding assets to higher yielding assets. The average loan portfolio was 77.1% and 76.8% and average investments were 19.8% and 18.5% of average earning assets for 2012 and 2011, respectively. During the year, the yields on investments available in the market place for purchase declined. In response management began shifting available funds to expand the loan portfolio. Average interest bearing liabilities declined $2.1 million for 2012 compared to 2011, which average noninterest bearing demand deposits rose $5.6 million during the same period.
The following table illustrates average balances of total interest-earning assets and total interest bearing liabilities for 2012, 2011 and 2010, 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 on tax-exempt municipal bonds are calculated as tax equivalent.
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, gains on securities sales, and rental income. Noninterest income increased $364 thousand or 35.1% to $1.4 million for 2012. Mortgage loan brokerage fees were $221 thousand or 150% higher than the prior year, as the result of the Company’s expansion of mortgage operations. ATM and interchange income increased $51 thousand or 28% from the growth in demand deposit accounts. Rental income is earned from leasing offices at the Colonial Avenue at 419 location. The leasing of foreclosed commercial properties contributed to higher rent in 2012. Other income for 2012 was above the prior year due largely to a receipt for damages received from a vendor.
Non-Interest Income
Noninterest Expense
Non-interest expense includes, among other things, salaries and benefits, occupancy costs, advertising and marketing, FDIC insurance, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Total noninterest expense increased $774 thousand or 8.1%, to $10.4 million in 2012. While the total of other real estate owned was less at the end of 2012 as compared to the end of 2011, the average balance held during the year was higher. Thus losses on sales and writedowns of other real estate and the associated carrying costs were $307 thousand higher for 2012 than 2011. Real estate taxes on foreclosed properties are included in other real estate owned expenses and accounted for a large part of the increase in other real estate owned expense, and resulted in a corresponding decrease in bank franchise taxes. The Commonwealth of Virginia avoids double taxation by allowing for the deduction of real estate property held on the first day of the year in determining net taxable capital subject to the bank franchise tax. The amount of property subject to real estate taxes as of January 1, 2012 was higher than January 1, 2011 due to the increase in foreclosed properties held by the bank during 2012. Effective January 1, 2012, the Board adopted a compensation plan for its non-employee members. Through December 31, 2012, noninterest expense included $227 thousand for fees paid to members of the board of directors. Discretionary spending on advertising and marketing was $55 thousand or 17% higher in 2012 than 2011. Data processing expense was up $83 thousand or 14% for 2012 compared to the prior year due to higher costs associated with software enhancements and upgrading of the core processor in mid-2011. Legal fees related to other real estate owned accounted for $39.0 thousand of the $48 thousand increase in professional fees. The Company realized the benefit of a favorable variance of $49 thousand in FDIC insurance expense due to overall decreases in assessment rates. The Company’s management and staff monitor and control operating expenses to provide adequate operational support and enable growth opportunities.
Non-Interest Expense
Salaries and employee benefits expense includes non-cash expense for stock based compensation of $29 thousand and $22 thousand in 2012 and 2011, respectively. See Part II, Item 8, Note 12 to the consolidated financial statements for additional information.
Income Tax Expense
Effective January 1, 2012, the Company recognized deferred tax assets resulting in an income tax benefit of $2.9 million and began recording tax expense on current period income before taxes. The decision to record deferred tax assets was based on an assessment of the Company’s profitable operations over the last five quarters and projections of future taxable income.
The Company recorded in its current provision for income tax expense for 2012, a net income tax benefit of $2.1 million. See Note 14 Income Taxes for a breakdown of current and deferred taxes and detail of the net deferred tax asset at the end of both years. The tax benefit of these operational losses were reflected as a reduction of current tax provisions and will continue to be reflected in future time periods if the Company continues to maintain operational profitability.
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
Maturities of Loans at December 31, 2012 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. The provision for loan losses increased from $1.2 million in 2011 to $1.4 million in 2012, due to the rise in loan volume. The allowance for loan losses as a percent of total loans declined from 1.60% at December 31, 2011 to 1.38% at December 31, 2012. Net charge-offs as a percent of average loans, similarly, declined from .96% to .61% at year-end 2011 and 2012, respectively. 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. Loans classified as impaired declined 1.8% from year end 2011 to a total of $15.6 million at the end of 2012. The reserves related to impaired loans declined from $629 thousand at December 31, 2011 to $208 thousand at December 31, 2012, due to management adopting a more aggressive policy of charging-off loans once classified as impaired.
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. Positive trends during 2012 indicate continued stabilization in the housing market and the value of the underlying collateral. Building permits increased 30.3% and starts grew 28.1%. New home sales for 2012 were 19.9% higher than the prior year. Economic conditions are assessed by management by reviewing trends in the following economic indices: Composite Leading Index, ISM Manufacturing Index, GDP Shadow Index, U.S. Unemployment Rate, Capacity Utilization Rate, Housing Starts, Oil Price, and the Consumer Price Index. Only the ISM Manufacturing Index showed a negative trend in 2012. The others were either positive or neutral. Based on the Bureau of Labor Statistics data, unemployment rates for the Roanoke, VA Metropolitan Statistical Area also reflected positive trends. An analysis of the available economic data indicates the economy is continuing to expand modestly. Management has adopted a cautiously optimistic view of the expansion going into 2013. As with most community banks, the loan portfolio is concentrated in commercial real estate loans. The percentage of loans collectively evaluated for impairment and classified as Commercial Real Estate declined from the end of 2011 to the end of 2012. For the purpose of more adequately analyzing the commercial real estate portfolio, these loans have been broken out into multiple loan pools. No single loan pool or industry concentration exceeds 15% of total loans at the end of 2012. At the end of 2012, unallocated reserves totaled $93. 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.
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. For 2012, 2011 and 2010, the allowance for Loan Losses is allocated in the manner prescribed by ASU 2010-20 (Refer to Note 1 of Consolidated Financial Statements), 2009 and prior years are allocated based on the percentage of loans in each category.
Asset Quality
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. 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.
As of December 31, 2012 and December 31, 2011, the Company had $2.7 million and $2.0 million, respectively, in non-performing loans, comprised entirely of non-accrual loans.
Investment Portfolio
At December 31, 2012, 2011 and 2010 all of the Company’s securities were classified as available-for-sale. The composition of the investment portfolio for the years ending December 31, 2012 and 2011 appear in Note 2 of this report. The following table presents the composition of the investment portfolio as of December 31, 2010.
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 program to provide FDIC deposit insurance coverage for certificates of deposit in excess of $250 thousand when requested by customers.
The Transaction Account Guarantee (TAG) Program expired on December 31, 2012. TAG was fully funded by banks through FDIC insurance and there was no cost to tax payers. HomeTown Bank has approximately thirty customers who would potentially be impacted if their balances in non-interest bearing transaction accounts fluctuated above $250 thousand and would no longer be insured. Most of these customers were here prior to the implementation of the TAG Program. As a member of the Promontory Financial Network, the Company is able to offer customers access to multi-million-dollar FDIC insurance and interest on funds placed into demand deposit accounts, money market deposit accounts, or both.
Total deposits increased by $2.4 million from $307.6 million at December 31, 2011 to $310.0 million at December 31, 2012. The Company’s ability to attract and retain deposits, and our cost of funds, has been, and will continue to be, significantly affected by market conditions.
The following table is a schedule of average balances and average rates paid for each deposit category for the periods presented:
Average Deposits and Rates Paid
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
The following table is a schedule of the return on average assets and return on average equity for the dates indicated:
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 and securities available for sale, net of securities pledged and cash balance requirements totaled $54.2 million at December 31, 2012 compared to $75.1 million at December 31, 2011.
Lines of credit available to meet liquidity needs include: $17.5 million of federal funds lines of credit and $11.7 million in Federal Home Loan Bank lines of credit immediately available. The Company is approved to borrow 20% of our total assets from the Federal Home Loan Bank subject to providing qualifying collateral. An $8 million guidance line of credit to borrow against securities was added as a funding source in 2012. The limit on this line is 15% of assets.
At December 31, 2012, the Company had commitments to originate $16.1 million of loans. Certificates of deposit scheduled to mature in the 12 month period ending December 31, 2013 total $78.4 million. Management believes that a significant portion of such deposits will remain with the Bank.
A financial institution can be exposed to several market risks that may impact its value or future earnings capacity.
These risks include interest rate risk, foreign currency exchange risk, commodity price risk and equity market price risk. Our primary market risk is interest rate risk. Interest rate risk is inherent because as a financial institution, we derive a significant amount of our operating revenue from customer deposits and possible borrowings at various terms and rates. These funds are then invested into earning assets (loans and investments) at various terms and rates.
Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specific time period as a result of scheduled maturities and repayment and contractual interest rate changes.
The primary objective of our asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. The goal is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.
Management strives to control the exposure to interest rate volatility and operates under policies and guidelines established by the Board of Directors, who set the level of acceptable risk, by understanding, reviewing and making decisions based on our risk position. In addition, pricing, promotion and product development activities are assessed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest risk objectives. We use a variety of analytical systems and balance sheet tools to manage interest rate risk.
Gap Analysis
Gap analysis tools monitor the “gap” between interest-sensitive assets and interest-sensitive liabilities. We use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios and by understanding the dynamic nature of our balance sheet components, the Company can position itself to take advantage of anticipated interest rate movements. We evaluate the securities, loans and deposit portfolios to manage our interest rate risk position.
The Interest Rate Sensitivity table indicates that, on a cumulative basis through twelve months, rate sensitive liabilities exceeded rate sensitive assets, resulting in an liability sensitive position at December 31, 2012 of $67.5 million for a cumulative gap ratio of -(15.57)%, which benefits us in a falling rate environment but hurts us in a rising rate environment. An asset interest sensitivity gap results when interest-sensitive assets exceed interest-sensitive liabilities for a specific repricing “horizon”. The gap is negative when interest-sensitive liabilities exceed interest-sensitive assets, as was the case at December 31, 2012, with respect to the one year time horizon. For a company with a negative gap, such as us, falling interest rates would be expected to have a positive effect on net interest income and rising rates would be expected to have the opposite effect. The table below reflects the balances of interest earning assets and interest bearing liabilities at the earlier of their repricing or maturity dates. Amounts of fixed rate loans are reflected at the earlier of their contractual maturity date or their contractual repricing date. Time deposits are reflected in the deposits’ maturity dates. Borrowed funds are reflected in the earliest contractual repricing interval. Interest bearing liabilities with no contractual maturity, such as interest bearing transaction accounts and savings deposits, are reflected in the earliest repricing interval due to contractual arrangements which give management the opportunity to vary the rates paid on these deposits within a thirty day or shorter period. However, we are under no obligation to vary the rates paid on those deposits within any given period. Fixed rate time deposits are reflected at their contractual maturity date.
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.
At December 31, 2012 and December 31, 2011, the Company had stockholders’ equity of $36.7 million and $33.1 million, respectively, an increase of $3.6 million or 11.0%. The change in stockholders’ equity in 2012 was mainly the result of net income of $4.6 million. The increase was partially offset by the payment of $1.3 million of dividends on the Troubled Asset Relief Program (TARP) preferred stock. The $1.3 million of dividends paid in 2012 included $800 thousand for dividends accumulated from prior years. In the fourth quarter of 2012, the U.S. Treasury auctioned the preferred shares and they were acquired by private investors.
The Company’s risk-based and tangible capital ratios continued to increase in 2012, remaining consistently above regulatory standards for well-capitalized banks.
HomeTown Bankshares Corporation
2012 Annual Report
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.
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, 2012 and 2011
Consolidated Statements of Income, Years Ended December 31, 2012 and December 31, 2011
Consolidated Statements of Comprehensive Income, Years Ended December 31, 2012 and December 31, 2011
Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2012 and December 31, 2011
Consolidated Statements of Cash Flows, Years Ended December 31, 2012 and December 31, 2011
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
HomeTown Bankshares Corporation
Consolidated Balance Sheets
December 31, 2012 and 2011
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Income
For the years ended December 31, 2012 and 2011
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2012 and 2011
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2012 and 2011
In Thousands, Except Share Data
See Notes to Consolidated Financial Statements
HomeTown Bankshares Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2012 and 2011
See 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.
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, the valuation of deferred tax assets and fair value measurements. 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.
Stock Split
On May 18, 2010, the Company declared a stock split, whereby each stockholder received one additional share for each ten shares owned. The shares were distributed on July 19, 2010 to stockholders of record at the close of business on June 18, 2010.
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 statement 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 of Atlanta (FHLB), the Company is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.
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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 may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
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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 may, at any point in time, be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer in the case of land acquisition and development loans or the general contractor in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.
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Residential real estate loans carry risks associated with the continued credit worthiness 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. In addition, there is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.
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Equity lines of credit carry risks associated with the continued credit worthiness of the borrower and changes in the value of the collateral.
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Consumer loans carry risks associated with the continued credit worthiness 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. As of December 31, 2012 and 2011, the Company had $6.5 million and $8.4 million of loans classified as TDRs, respectively.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Consumer loans are charged off when they become 120 days past due. Non-consumer loans are charged off when the loan becomes 180 days past due unless the loan is well secured and in the process of collection. Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:
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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 from three to ten years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.
Foreclosed Properties
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The valuation allowance for properties at December 31, 2012 was $575 thousand compared to $331 thousand at December 31, 2011.
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 costs as they are incurred. For the years ended December 31, 2012 and 2011, advertising expense was $386 thousand and $331 thousand, respectively.
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, 2012.
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. 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 solely to outstanding stock options and are 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.
Financial Instruments
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Stock-Based Compensation Plan
The 2005 Stock Option Plan was approved by stockholders on April 20, 2006, which authorized 550,000 shares of common stock to be used in the granting of incentive options to employees and directors. This is the first stock incentive plan adopted by the Company. Under the plan, the option price cannot be less than the fair market value of the stock on the date granted. An option’s maximum term is ten years from the date of grant. Options granted under the plan may be subject to a vesting schedule.
The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
Reclassifications
Certain reclassifications have been made to prior periods to conform to current year presentation.
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU were effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments were effective for interim and annual periods beginning after December 15, 2011 with prospective application. The adoption of the new guidance did not have a material impact on the Company's financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” The new guidance amends disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity. All changes in OCI must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The guidance does not change the items that must be reported in OCI. The Company adopted this guidance effective 2012, and has elected to present two separate but consecutive financial statements.
In September 2011, the FASB issued ASU 2011-08, “Intangible - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the consolidated balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, "Derivatives and Hedging", including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not expect the adoption of ASU 2013-01 to have a material impact on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.
Note 2. Investment Securities
The amortized cost and fair value of securities available for sale are as follows:
At December 31, 2012, the Company does not consider any security in an unrealized loss position to be other than temporarily impaired.
U.S. Government and federal agency securities. The unrealized losses on four of the Company’s investments in obligations of the U.S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2012.
Mortgage-backed securities. The unrealized losses in seven 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, 2012.
Municipal securities. The unrealized losses on the Company’s five investments in obligations of municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates, credit spreads, ratings and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2012.
The following tables demonstrate the unrealized loss position of securities available for sale at December 31, 2012 and 2011.
The amortized cost and estimated fair value of securities at December 31, 2012, 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 2012 and 2011 were $24.8 million and $28.2 million, respectively. The Company realized $131 thousand in gains on sales of six available for sale securities in 2012, compared to $196 thousand from six securities sold in the prior year. Total pledged securities had a fair market value of $16.1 million at December 31, 2012 and $13.0 million at December 31, 2011. Securities having a fair market value of $5.6 million were pledged to secure public deposits, while securities pledged to secure Federal Home Loan Bank borrowings totaled $10.1 million. $400 thousand in securities were pledged for other purposes at December 31, 2012.
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.
Note 3. Loans Receivable
The major classifications of loans in the consolidated balance sheets at December 31, 2012 and 2011 were as follows:
The past due and nonaccrual status of loans as of December 31, 2012 was as follows:
The past due and nonaccrual status of loans as of December 31, 2011 was as follows:
There were no loans past due ninety days or more and still accruing interest at December 31, 2012 or December 31, 2011.
Impaired loans, which include TDRs of $6.5 million and the related allowance at December 31, 2012, were as follows:
Impaired loans, which include TDRs of $8.4 million and the related allowance at December 31, 2011 were as follows:
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans tables above are troubled debt restructurings (“TDR’s”) that were classified as impaired. TDR’s at December 31 2012 were comprised of 3 loans totaling $6.5 million. Two of the three loans totaling $6.3 million are performing in accordance with their restructured terms and are not on nonaccrual status. The remaining $199 thousand loan is not past due, but is on nonaccrual status. This compares with $8.4 million in total restructured loans at December 31, 2011. One of the loans classified as a TDR at the end of the 2011 deteriorated further in 2012, resulting in a partial charge-off of $478 thousand, and subsequently transferred to other real estate owned for $1.6 million. The amount of the valuation allowance related to total TDR’s was $137 thousand as of December 31, 2012 and $277 thousand as of December 31, 2011.
The following table presents by class of loan, information related to loans modified in a TDR during 2012:
During 2012, the Company modified one loan considered to be a TDR. The terms were modified changing the loan from a home equity line of credit to a non-real estate secured term loan. This TDR was current at the end of 2012, and had not subsequently defaulted.
The following table presents by class of loan, information related to loans modified in a TDR during 2011:
During 2011, the Company modified 2 loans that were considered to be TDRs. The Company accepted a permanent reduction in the recorded investment on one loan and extended the interest only payment term of another loan.
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 TDR’s 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, 2012, the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment) and the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
The following table presents, as of December 31, 2011, the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment) and the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
Loans by credit quality indicators as of December 31, 2012 were as follows:
At December 31, 2012, the Company does not have any loans classified as Doubtful or Loss.
Loans by credit quality indicators as of December 31, 2011 were as follows:
At December 31, 2011, the Company does not have any loans classified as Loss.
Note 5. Foreclosed Properties
Changes in foreclosed properties for 2012 were as follows:
Changes in foreclosed properties for 2011 were as follows:
The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2012 and December 31, 2011 were as follows:
Note 6. Property and Equipment
The major components of property and equipment at December 31, 2012 and 2011 were as follows:
Depreciation and amortization expense was $508 thousand and $538 thousand for the years ended December 31, 2012 and 2011, respectively.
Leases
The Company currently leases its main office under a non-cancelable lease agreement. The lease expires December 15, 2015 and provides an option to extend the lease for two additional five-year periods. Terms of the agreement provide for an annual rental increase based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. Minimum annual payments until expiration at December 15, 2015 are $161,040. The Company currently leases a branch location under a non-cancelable lease agreement. Terms of the agreement provide for an annual rental increase based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. The lease expires on July 31, 2016 and provides an option to extend the lease for two additional five-year periods. Minimum annual payments until expiration at July 31, 2016 are $96,000. The Company currently leases another branch location along with additional office space under non­cancelable lease agreements. Terms of the agreements provide for a rental increase of ten percent upon renewal of the leases. The leases expire on April 30, 2013. On January 30, 2013, the Company entered into an agreement to extend the leases through September 30, 2013. After that the Company has the option to extend the leases on a monthly basis until they vacate the premises and move into the new branch currently under construction. Minimum payments until expiration at September 30, 2013 are $23,687.
The current minimum annual lease payments under non-cancelable leases in effect at December 31, 2012 were as follows:
Rent expense for the years ended December 31, 2012 and 2011 was $315 thousand and $333 thousand, respectively.
Note 7. Deposits
The aggregate amount of time deposits in denominations of one hundred thousand dollars or more at December 31, 2012 and 2011 was $66.6 million and $51.7 million, respectively.
At December 31, 2012, 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, 2012 and 2011, brokered deposits totaled $35.9 million and $23.5 million, respectively, and were included in interest-bearing deposits on the consolidated balance sheets.
Note 8. Short Term Borrowings
Short term borrowings consist of the following at December 31, 2012 and 2011:
Short term borrowings consist of securities sold under agreements to repurchase, which 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. At December 31, 2012, the Bank had established $17.5 million in a federal funds line of credit. Another $8.0 million line of credit was established and secured by Bank owned securities in safekeeping. This line is not to exceed 15% of the value of the securities. At year-end 2012, there was no balance outstanding on either line of credit.
Note 9. Federal Home Loan Bank Borrowings
The Company has outstanding long-term debt with the Federal Home Loan Bank of Atlanta in the amount of $22.0 million and $19.0 million as of December 31, 2012 and 2011, respectively. The long-term debt at December 31, 2012 is comprised of one convertible advance in the amount of $4 million, one fixed rate advance in the amount of $3 million, and one fixed rate advance in the amount of $12 million, and one variable rate advance in the amount of $3 million. The Federal Home Loan Bank of Atlanta has the option to convert the convertible advances on the conversion dates below, and on any quarterly interest payment date thereafter, with at least two business days notice. If called, the advance will be converted into a 3-month London Interbank Offered Rate (LIBOR) based adjustable rate credit. The variable rate advance provided short term financing at the FHLB’s equivalent to a Fed Funds rate and the ability to prepay without a penalty.
At December 31, 2012 and 2011, borrowings from the Federal Home Loan Bank of Atlanta were as follows:
The Company had collateral pledged on these borrowings at December 31, 2012 including real estate loans totaling $46.2 million, investment securities totaling $7.4 million, and Federal Home Loan Bank stock with a book value of $1.5 million.
Note 10. 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).
Derivative assets: Derivative assets 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 assets by using pricing models that consider observable market data (Level 2).
Derivative liabilities: Derivative liabilities 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 liabilities 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, 2012 and 2011:
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. 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.
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 during the period.
At December 31, 2012 and December 31, 2011, 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, 2012:
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 aggregated contractual maturities on such time deposits.
Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At December 31, 2012 and 2011, management believes the carrying value of federal funds sold approximates estimated market value.
Available-for-sale securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.
Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
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 aggregated contractual maturities on such time deposits.
Short term borrowings: Short term borrowings consist of overnight borrowings and mature within one to three days. At December 31, 2012 and 2011, management believes the carrying value of securities sold under agreements to repurchase approximates estimated market value.
FHLB borrowings: The fair values for long term borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long term borrowings to the contractual maturities on such long term borrowings.
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, 2012 and 2011, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.
The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2012 and 2011.
Note 11. Earnings per Common Share
The following table details the computation of basic and diluted earnings per common share for the years ended December 31, 2012 and 2011.
At December 31, 2012 and 2011, stock options to purchase 459,690 and 463,100 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be anti­dilutive.
Note 12. Stock Based Compensation
The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors may grant stock options to directors, officers and employees. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. No options were granted in the years ended December 31, 2012 or 2011.
A summary of option activity under the 2005 stock option plan during the year ended December 31, 2012 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, 2012.
The Company recorded stock based compensation expense of $29 thousand and $22 thousand for the years ended December 31, 2012 and 2011, respectively.
In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five year period and compensation expense is charged to income ratably over the vesting period and was $28 thousand in 2012 and $11 thousand in 2011. 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 2012 was $4.20. The Company granted 20,971 shares of restricted stock under the plan in 2012; there were no restricted stock grants in 2011.
As of December 31, 2012, there was $97 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2017. A summary of the activity for restricted stock awards for the periods indicated is presented below:
Note 13. Stock Employee Benefit Plans Defined Contribution 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 $157 thousand and $146 thousand for the years ended December 31, 2012 and 2011, respectively.
Note 14. 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 2009. The Company has operating loss carryforwards of $4.0 million for federal income tax purposes that may be used to offset future taxable income. If not previously utilized, the federal loss carryforward will begin to expire in 2025.
The current and deferred components of income tax benfit for the periods ended December 31, 2012 and 2011 are as follows:
Rate Reconiliation
Total income tax expense (benefit) 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 tax assets at December 31, 2012 and 2011 are summarized as follows:
Note 15. Commitments and Contingencies
Litigation
In the normal course of business the Company may be involved in various legal proceedings. The Company was not involved in any litigation for the year ended December 31, 2012.
Financial Instruments with Off-Balance-Sheet Risk
The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheet.
The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for off-balance-sheet instruments.
A summary of the Company’s commitments at December 31, 2012 and 2011 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.
Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit may or may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
The Company is required to maintain certain required reserve balances with the Federal Reserve Bank. At December 31, 2012 and 2011, these reserve balances amounted to $3.1 million and $3.0 million, respectively.
The Company from time to time may have cash and cash equivalents on deposit with financial institutions that exceed federally insured limits.
Financial Derivatives
Financial Derivatives are reported at fair value in other assets and other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings. In 2008, the Company entered into interest rate swaps to facilitate customer transactions in connection with their financing needs. Upon entering into swaps with the borrowers to meet their financing needs, the Company entered into offsetting positions with counterparties to minimize risk to the Company. These back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrowers and counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no risk.
A summary of the Company’s interest rate swaps is as follows (dollars in thousands):
Note 16. 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, 2012 there was no retained earnings available from which to pay dividends.
Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total 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, 2012, management believes the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2012, the most recent notification from the Federal Reserve Bank, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table.
Note 17. 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:
Aggregate deposit balances with related parties at December 31, 2012 and 2011 were $4,696,000 and $4,464,000, respectively.
Note 18. Capital Transaction
The Department of the Treasury created the Troubled Asset Relief Program Capital Purchase Program in 2008 to make capital available to certain U.S. financial institutions. Under this program, the Treasury would purchase preferred stock with an initial cumulative dividend rate of 5% and receive warrants to purchase additional preferred stock with a cumulative dividend rate of 9%. Participating financial institutions were required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program.
On September 18, 2009, as part of the Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement with the Treasury, pursuant to which the Company sold (i) 10,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 par value per share and (ii) a warrant (the “Warrant”) to purchase 374 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, $1,000 par value per share, at an initial exercise price of $.01 per share. The Warrant was exercised immediately. The discount will be accreted up to $374 thousand over five years.
The Preferred Stock qualifies as Tier 1 capital and the Series A pays cumulative dividends at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum. The Series B pays cumulative dividends at a rate of 9% per annum. The Company paid a total of $1.3 million in dividends on preferred stock in 2012. Of the total dividends paid, $534 thousand were for 2012 and $800 thousand were for 2011. Due to the net loss incurred in 2010, the Company was prohibited from paying dividends during 2011 on the preferred stock.
On October 31, 2012, the Company's $10 million of Series A Preferred Stock and $374 thousand Series B Preferred Stock was sold by the Treasury as part of its efforts to manage and recover its investments under the TARP. While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients.
Note 19. Condensed Parent Company Financial Information
Financial information pertaining only to HomeTown Bankshares Corporation follows. The parent company was formed on September 4, 2009.
Certified Public Accountants
and Consultants
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 as of December 31, 2012 and 2011, 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 audit 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, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Winchester, Virginia
March 28, 2013
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’s internal control over financial reporting as of December 31, 2012. 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. Based on this assessment, management believes that, as of December 31, 2012, HomeTown Bankshares’s internal control over financial reporting was effective.
This annual report does not include an attestation report of HomeTown Bankshares’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by HomeTown Bankshares’s 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 three months ended December 31, 2012 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 2013 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 2013 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.hometownbankva.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 2013 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 2013 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 2013 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, 2012.
(1)
Excludes restricted stock awards currently vesting under the Restricted Stock Plan. See Part II, Item 8, Note 12 for a detailed discussion of the Restricted Stock Plan.
(2)
Represents options to purchase common stock outstanding under the 2005 Stock Option Plan. See Part II, Item 8, Note 12 for a detailed discussion of the Restricted Stock Plan.
(3)
Represents shares available for future issuance under the 2005 Stock Option Plan
(4)
Represents shares available for future issuance under the Restricted Stock Plan.
ITEM 13.
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 2013 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 2013 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements:
Exhibit
Number
3.1
Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.
3.2
By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).
4.1
See Exhibit 3.1.
10.2*
Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.
10.3*
Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.
10.4*
HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.5
Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.
10.6*
Employment Agreement dated May 1, 2006 between HomeTown Bank and C. W. Maness, Jr., incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.7
Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.
10.8*
Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2010.
10.9
Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.
10.10*
Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.
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).
99.1
TARP Chief Executive Officer Certification
99.2
TARP Chief Financial Officer Certification
Exhibit
Number
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, 2012, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2012 and 2011; (ii) Consolidated Statements of Income for the years ended December 31, 2012, and 2011; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, and 2011; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements.
*
Denotes management contract or compensatory plan or arrangement.
**
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 28, 2013
Susan K. Still
Chief Executive Officer
(principal executive officer)
/S/ GEORGE B. CARTLEDGE, JR.
Director
March 28, 2013
George B. Cartledge, Jr.
/s/ NANCY H. AGEE
Director
March 28, 2013
Nancy H. Agee
/S/ WARNER N. DALHOUSE
Director
March 28, 2013
Warner N. Dalhouse
/S/ VICTOR F. FOTI
Director
March 28, 2013
Victor F. Foti
/S/ DANIEL D. HAMRICK
Director
March 28, 2013
Daniel D. Hamrick
/S/ WILLIAM R. RAKES
Director
March 28, 2013
William R. Rakes
/S/ JAMES M. TURNER, JR.
Director
March 28, 2013
James M. Turner, Jr.
/S/ CHARLES W. MANESS, JR.
Chief Financial Officer
March 28, 2013
Charles W. Maness, Jr.
(principal accounting and financial officer)
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.
3.2
By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).
4.1
See Exhibit 3.1.
10.2*
Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.
10.3*
Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.
10.4*
HomeTown Bank 2005 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.5
Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.
10.6*
Employment Agreement dated May 1, 2006 between HomeTown Bank and C. W. Maness, Jr., incorporated herein by reference to Exhibit 10.4 to Form 10QSB for the quarter ended June 30, 2006.
10.7
Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.
10.8*
Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2010.
10.9
Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.
10.10*
Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.
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).
99.1
TARP Chief Executive Officer Certification
99.2
TARP Chief Financial Officer 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, 2012, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2012 and 2011; (ii) Consolidated Statements of Income for the years ended December 31, 2012, and 2011; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, and 2011; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011; 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.