HomeTown Bankshares (HMTA) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended March 31, 2011.

Or

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

for the transition period from              to             .

Commission File Number: 333-158525

HOMETOWN BANKSHARES CORPORATION

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

Virginia	26-4549960
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
202 South Jefferson Street, Roanoke, Virginia	24011
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (do not check if a smaller reporting company)	Smaller reporting company	x

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

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

As of May 13, 2011, 3,241,547 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX

PART 1. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		3
Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010		4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010		5
Notes to Consolidated Financial Statements		6
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
Item 4.	CONTROLS AND PROCEDURES	22
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	(Removed and Reserved)	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
SIGNATURES		24

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

HOMETOWN BANKSHARES CORPORATION

Consolidated Balance Sheets

March 31, 2011 and December 31, 2010

In Thousands, Except Share and Per Share Data	Unaudited March 31, 2011			December 31, 2010
Assets
Cash and due from banks	$	11,619		$	4,479
Federal funds sold		10,927			20,876
Securities available for sale, at fair value		57,083			51,603
Restricted equity securities		2,511			2,579
Loans, net of allowance for loan losses of $5,079 in 2011 and $5,228 in 2010		259,096			258,878
Property and equipment, net		8,657			8,772
Other real estate owned		4,116			2,976
Accrued income		1,169			1,222
Prepaid FDIC insurance		804			984
Other assets		899			735
Total assets	$	356,881		$	353,104
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	21,541		$	17,411
Interest-bearing		283,458			283,082
Total deposits		304,999			300,493
Short term borrowings		373			281
Federal Home Loan Bank borrowings		19,650			21,350
Accrued interest payable		782			766
Other liabilities		802			558
Total liabilities		326,606			323,448
Commitments and contingencies		—			—
Stockholders’ Equity:
Preferred stock, $1,000 par value; 10,000 shares of series A and 374 shares of series B authorized, issued and outstanding at March 31, 2011 and December 31, 2010		10,374			10,374
Discount on preferred stock		(269	)		(287	)
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,241,547 in 2011 and 2010 (Includes 8,207 restricted shares in 2011 and 2010)		16,167			16,167
Surplus		15,447			15,436
Retained deficit		(11,378	)		(11,622	)
Accumulated other comprehensive loss		(66	)		(412	)
Total stockholders’ equity		30,275			29,656
Total liabilities and stockholders’ equity	$	356,881		$	353,104

See Notes to Consolidated Financial Statements

3

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Income

For the three months ended March 31, 2011 and 2010

In Thousands, Except Share and Per Share Data	Unaudited March 31, 2011		Unaudited March 31, 2010
Interest income:
Loans and fees on loans	$	3,513	$	3,413
Federal funds sold		10		11
Taxable investment securities		444		466
				��
Total interest income		3,967		3,890
Interest expense:
Deposits		1,085		1,284
Other borrowed funds		133		139
Total interest expense		1,218		1,423
Net interest income		2,749		2,467
Provision for loan losses		248		353
Net interest income after provision for loan losses		2,501		2,114
Noninterest income:
Service charges on deposit accounts		101		119
Mortgage loan brokerage fees		24		17
Rental income		34		31
Gain on sale of other real estate		—		77
Gain on sale of investment securities		4		—
Other income		19		13
Total noninterest income		182		257
Noninterest expense:
Salaries and employee benefits		1,216		1,112
Occupancy and equipment expense		332		311
Data processing expense		137		105
Advertising and marketing expense		75		93
Professional fees		103		78
FDIC insurance assessment		189		125
Loss on sale of other real estate owned		18		—
Other expense		351		292
Total noninterest expense		2,421		2,116
Net income before income taxes		262		255
Income tax expense		—		—
Net income	$	262	$	255
Dividends accumulated on preferred stock		133		133
Accretion of discount on preferred stock		18		17
Net income available to common shareholders	$	111	$	105
Income per share, basic and diluted	$	0.03	$	0.03
Weighted average shares outstanding		3,241,547		3,236,234

See Notes to Consolidated Financial Statements

4

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Cash Flows

Three months ended March 31, 2011 and 2010

In Thousands	Unaudited March 31, 2011			Unaudited March 31, 2010
Cash flows from operating activities:
Net income	$	262		$	255
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		141			154
Provision for loan losses		248			353
Amortization of premium on securities, net		121			47
Gain on sale of investment securities		(4	)		—
Loss (Gain) on sale of other real estate		18			(77	)
Stock compensation expense		11			11
Changes in assets and liabilities:
Accrued income		53			(55	)
Other assets		16			28
Accrued interest payable		16			83
Other liabilities		244			218
Net cash flows provided by operating activities		1,126			1,017
Cash flows from investing activities:
Net (increase) decrease in federal funds sold		9,949			(4,702	)
Purchases of investment securities		(8,974	)		(5,788	)
Sales/maturities of available for sale securities		3,723			5,728
Sale (purchase) of restricted equity securities, net		68			(29	)
Net increase in loans		(466	)		(6,398	)
(Additions to) or Proceeds from sale of other real estate		(1,158	)		344
Purchases of property and equipment		(26	)		(47	)
Net cash flows provided by (used in) investing activities		3,116			(10,892	)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits		4,130			(2,711	)
Net increase in interest-bearing deposits		376			13,702
Net increase (decrease) in short-term borrowings		92			(173	)
Net decrease in long-term FHLB borrowings		(1,700	)		(450	)
Preferred stock dividend payment		—			(133	)
Net cash flows provided by financing activities		2,898			10,235
Net increase in cash and cash equivalents		7,140			360
Cash and cash equivalents, beginning		4,479			7,051
Cash and cash equivalents, ending	$	11,619		$	7,411
Supplemental disclosure of cash flow information:
Cash payments for interest	$	1,202		$	1,340
Cash payments for income taxes	$	—		$	—
Supplemental disclosure of noncash investing activities:
Unrealized gain on securities available for sale	$	346		$	383
Transfer from loans to other real estate	$	1,140		$	—

See Notes to Consolidated Financial Statements

5

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 Registrant on a one-for-one basis to become a single-bank holding company with the Bank becoming a wholly-owned subsidiary. The Bank was organized and incorporated under the laws of the State of Virginia on November 9, 2004 and commenced operations on November 14, 2005. The Bank currently serves Roanoke City, Virginia, the County of Roanoke, Virginia, the City of Salem, Virginia, Christiansburg, Virginia, and surrounding areas. As a state chartered bank which is a member of the Federal Reserve System, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Board.

Basis of Presentation

The consolidated financial statements as of March 31, 2011 and for the periods ended March 31, 2011 and 2010 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2010, included in the Company’s Form 10-K for the year ended December 31, 2010.

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

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary HomeTown Bank. All significant intercompany accounts and transactions associated with the Company’s wholly-owned subsidiary have been eliminated.

Our accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K. Please refer to the Form 10-K for these policies.

On May 18, 2010, the Company declared a 10% 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. All applicable share and per-share amounts in the consolidated financial statements and related disclosures have been retroactively adjusted to reflect this stock dividend.

Note 2. Investment Securities

The amortized cost and fair value of securities available for sale as of March 31, 2011 and December 31, 2010, are as follows:

(Dollars In Thousands)	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	26,031	$	238	$	(416	)	$	25,853
Mortgage-backed securities		28,041		199		(26	)		28,214
Municipal securities		3,077		16		(77	)		3,016
	$	57,149	$	453	$	(519	)	$	57,083
(Dollars In Thousands)	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	23,632	$	210	$	(497	)	$	23,345
Mortgage-backed securities		26,343		52		(75	)		26,320
Municipal securities		2,040		—		(102	)		1,938
	$	52,015	$	262	$	(674	)	$	51,603

6

As of March 31, 2011, there were no individual securities that had been in a continuous loss position for more than 12 months.

The following table demonstrates the unrealized loss position of securities available for sale at March 31, 2011.

	March 31, 2011
	Less than 12 months					12 months or more				Total
(Dollars In Thousands)	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U. S. Government agency securities	$	15,037	$	(416	)	$	—	$	—	$	15,037	$	(416	)
Mortgage-backed securities		3,197		(26	)		—		—		3,197		(26	)
Municipal securities		2,032		(77	)		—		—		2,032		(77	)
	$	20,266	$	(519	)	$	—	$	—	$	20,266	$	(519	)

There are 30 debt securities with fair values totaling $20.3 million considered temporarily impaired at March 31, 2011. The primary cause of impairment was fluctuations in interest rates. At March 31, 2011, the Company does not consider any bond in an unrealized loss position to be other than temporarily impaired.

The Company realized a $4 thousand gain on sale of its available for sale securities for the period ended March 31, 2011 and had no realized gain or loss on sale of securities in the first quarter of 2010.

The amortized cost and estimated fair values of investment securities available for sale at March 31, 2011 are as follows:

(Dollars In Thousands)	Amortized Cost		Estimated Fair Value
Less than one year	$	—	$	—
Over one through five years		1,773		1,778
Over five through ten years		15,695		15,746
Greater than 10 years		39,681		39,559
	$	57,149	$	57,083

Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at March 31, 2011 and December 31, 2010 were as follows:

(Dollars In Thousands)	March 31, 2011			December 31, 2010
Construction:
Residential	$	7,432		$	7,608
Land acquisition, development & commercial		27,898			28,981
Real Estate:
Residential		53,999			55,381
Commercial		111,365			109,674
Commercial, industrial & agricultural		39,022			39,204
Equity lines		20,855			20,121
Consumer		3,604			3,137
	$	264,175		$	264,106
Less allowance for loan losses		(5,079	)		(5,228	)
Loans, net	$	259,096		$	258,878

7

The past due and non accrual status of loans as of March 31, 2011 was as follows:

(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	—	$	—	$	786	$	786	$	6,646	$	7,432	$	786
Land acquisition, development & commercial		—		—		3,179		3,179		24,719	$	27,898		3,179
Real Estate:
Residential		51		238		450		739		53,260	$	53,999		450
Commercial		172		1,150		—		1,322		110,043	$	111,365		1,150
Commercial, industrial & agricultural		144		147		22		313		38,709	$	39,022		268
Equity lines		9		—		132		141		20,714	$	20,855		132
Consumer		328		—		—		328		3,276	$	3,604		—
Total	$	704	$	1,535	$	4,569	$	6,808	$	257,367	$	264,175	$	5,965

The past due and non accrual status of loans as of December 31, 2010 was as follows:

(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	—	$	—	$	224	$	224	$	7,384	$	7,608	$	224
Land acquisition, development & commercial		960		429		2,166		3,555		25,426		28,981		2,166
Real Estate:										—
Residential		261		5,016		875		6,152		49,229		55,381		875
Commercial		—		—		—		—		109,674		109,674
Commercial, industrial & agricultural		—		—		419		419		38,785		39,204		419
Equity lines		202		132		—		334		19,787		20,121		—
Consumer		2		—		—		2		3,135		3,137		—
Total	$	1,425	$	5,577	$	3,684	$	10,686	$	253,420	$	264,106	$	3,684

There were no loans past due ninety days or more and still accruing interest at March 31, 2011 or December 31, 2010.

8

Impaired loans, which include TDRs of $1.9 million and the related allowance at March 31, 2011 were as follows:

(Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	2,007	$	2,007	$	24	$	2,007	$	13
Land acquisition, development & commercial		6,715		8,051		1,088		6,705		65
Real Estate:
Residential		1,738		1,738		—		1,741		16
Commercial		8,867		8,867		241		8,875		97
Commercial, industrial & agricultural		247		247		0		327		3
Equity lines		132		132		132		132		0
Consumer		—		—		—
Total	$	19,706	$	21,042	$	1,485	$	19,787	$	194

Impaired loans, which include TDRs of $1.9 million and the related allowance at December 31, 2010 were as follows:

(Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	2,007	$	2,007	$	—	$	1,250	$	36
Land acquisition, development & commercial		7,893		9,229		1,065		7,349		239
Real Estate:
Residential		7,210		7,210		175		6,903		192
Commercial		9,302		9,302		282		6,322		273
Commercial, industrial & agricultural		428		428		—		960		17
Equity lines		—		—		—		49		—
Consumer		—		—		—		—		—
Total	$	26,840	$	28,176	$	1,522	$	22,833	$	757

Note 4. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

(Dollars In Thousands)	March 31, 2011			December 31, 2010
Balance at the beginning of the year	$	5,228		$	2,862
Provision charged to operations		248			6,453
Recoveries of loans charged off		1			77
Loans charged off		(398	)		(4,164	)
Balance at the end of the year	$	5,079		$	5,228

9

The following table presents, as of March 31, 2011, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

	Construction						Real Estate
	Residential			Land acquisition, development & commercial			Residential			Commercial			Commercial, industrial & agricultural			Equity lines		Consumer		Unallocated		Total
Beginning balance	$	121		$	1,802		$	785		$	1,356		$	902		$	222	$	40	$	—	$	5,228
Charge-offs	$	(131	)	$	—		$	(171	)	$	(81	)	$	(15	)	$	—	$	—	$	—	$	(398	)
Recoveries	$	—		$	—		$	—		$	—		$	—		$	—	$	1	$	—	$	1
Provisions	$	110		$	(57	)	$	142		$	(229	)	$	84		$	102	$	76	$	20	$	248
Ending Balance	$	100		$	1,745		$	756		$	1,046		$	971		$	324	$	117	$	20	$	5,079
Ending balance: Individually evaluated for impairment	$	65		$	1,046		$	—		$	134		$	108		$	132	$	—	$	—	$	1,485
Ending balance: Collectively evaluated for impairment	$	35		$	699		$	756		$	912		$	863		$	192	$	117	$	20	$	3,594
Loans:
Ending balance	$	7,432		$	27,898		$	53,999		$	111,365		$	39,022		$	20,855	$	3,604	$	—	$	264,175
Ending balance: Individually evaluated for impairment	$	2,007		$	8,265		$	188		$	8,867		$	247		$	132	$	—	$	—	$	19,706
Ending balance: Collectively evaluated for impairment	$	5,425		$	19,633		$	53,811		$	102,498		$	38,775		$	20,723	$	3,604	$	—	$	244,469

10

The following table presents, as of December 31, 2010, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

Allowance for loan losses:

	Construction				Real Estate
	Residential		Land acquisition, development & commercial		Residential		Commercial		Commercial, industrial & agricultural		Equity lines		Consumer		Total
Ending balance	$	121	$	1,802	$	785	$	1,556	$	702	$	222	$	40	$	5,228
Ending balance: Individually evaluated for impairment	$	—	$	1,065	$	175	$	282	$	—	$	—	$	—	$	1,522
Ending balance: Collectively evaluated for impairment	$	121	$	737	$	610	$	1,274	$	702	$	222	$	40	$	3,706
Loans:
Ending balance	$	7,608	$	28,981	$	55,381	$	109,674	$	39,204	$	20,121	$	3,137	$	264,106
Ending balance: Individually evaluated for impairment	$	2,007	$	7,893	$	7,210	$	9,302	$	428	$	—	$	—	$	26,840
Ending balance: Collectively evaluated for impairment	$	5,601	$	21,088	$	48,171	$	100,372	$	38,776	$	20,121	$	3,137	$	237,266

Loans by credit quality indicators as of March 31, 2011 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Total
Construction:
Residential	$	5,424	$	—	$	1,222	$	786	$	7,432
Land acquisition, development & commercial		17,468		2,166		5,085		3,179	$	27,898
Real Estate:
Residential		48,281		222		5,046		450	$	53,999
Commercial		99,035		3,024		8,156		1,150	$	111,365
Commercial, industrial & agricultural		37,862		15		877		268	$	39,022
Equity lines		20,723		—		—		132	$	20,855
Consumer		3,296		—		308	$	—	$	3,604
Total	$	232,089	$	5,427	$	20,694	$	5,965	$	264,175

11

Loans by credit quality indicators as of December 31, 2010 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Total
Construction:
Residential	$	5,250	$	350	$	1,784	$	224	$	7,608
Land acquisition, development & commercial		18,564		2,524		5,727		2,166		28,981
Real Estate:
Residential		47,782		223		6,501		875		55,381
Commercial		94,965		5,152		9,557		—		109,674
Commercial, industrial & agricultural		37,239		35		1,511		419		39,204
Equity lines		20,121		—		—		—		20,121
Consumer		3,059		—		78		—		3,137
Total	$	226,980	$	8,284	$	25,158	$	3,684	$	264,106

At March 31, 2011 and December 31, 2010, the Company does not have any loans classified as Doubtful or Loss.

Note 5. Stock Based Compensation

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Company’s Board of Directors may grant stock options to directors, officers and employees. The Plan authorizes grants of options to purchase up to 550,000 shares of the Company’s authorized but unissued common stock. Accordingly, options for the purchase of 492,360 shares of authorized common stock have been issued under the Plan and 57,640 shares of authorized common stock are available for issue under the Plan. There are options for 492,360 shares granted currently outstanding as of March 31, 2011, of which, 467,793 options are vested. All stock options have been granted with an exercise price equal to the stock’s fair market value at the date of the grant. As of March 31, 2011, no options have been exercised. The Company recorded compensation expense of $11 thousand for the three months ended March 31, 2011 and 2010. The aggregate intrinsic value of outstanding stock options was $0 at March 31, 2011. The weighted average remaining contractual term of outstanding options was 5.3 years at March 31, 2011.

The Board of Directors adopted a Restricted Stock Plan (“the Plan”) in September 2009 whereby 120,000 shares of the Company’s authorized but unissued common stock was set aside to be granted by the Board of Directors in its discretion. The principal purpose of the Plan was to make shares available for issue to the executive officers of the Company and the Bank in payment of incentives earned under the Incentive Compensation Plan. Because the Company is a TARP participant, the Company’s most highly paid employee cannot be paid a cash bonus. However, the Treasury regulations permit payment of such a bonus in restricted stock. Even though the restriction would only apply to the CEO in the case of the Company and the Bank, each of the executive officers of the Company and the Bank have elected to take their bonuses in stock rather than cash.

The restrictions attached to stock issued under the Plan restrict transfer of the shares during the time TARP funding is outstanding and provide for vesting over a five-year period. During the first quarter of 2010, the Company issued 8,207 shares of stock under the Plan.

The remaining unamortized compensation expense for stock options and restricted stock was $128 thousand at March 31, 2011 and will be recognized over the next 3.5 years.

Note 6. Fair Value Measurement

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

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

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

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

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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 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 considers 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 considers 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 considers observable market data (Level 2).

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010:

(Dollars In Thousands)			Carrying value at March 31, 2011
Description	Balance as of March 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	25,853		$	25,853
Mortgaged-backed securities		28,214			28,214
Municipal securities		3,016			3,016
Derivative assets		260			260
Liabilities:
Derivative liabilities	$	260		$	260
(Dollars In Thousands)			Carrying value at December 31, 2010
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	23,345		$	23,345
Mortgaged-backed securities		26,320			26,320
Municipal securities		1,938			1,938
Derivative assets		301			301
Liabilities:
Derivative liabilities	$	301		$	301

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Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or writedowns 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 financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

Other Real Estate Owned (OREO): Foreclosed assets are adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair market value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the OREO as nonrecurring Level 2. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the OREO as nonrecurring Level 3.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010.

(Dollars In Thousands)			Carrying value at March 31, 2011
Description	Balance as of March 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of valuation allowance	$	3,760				$	3,760
Other real estate owned	$	4,116		$	4,116
(Dollars In Thousands)			Carrying value at December 31, 2010
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans, net of valuation allowance	$	4,951		$	211	$	4,740
Other real estate owned	$	2,976		$	2,976

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 balance sheet for cash and due from banks approximate their fair values.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. Management believes the carrying value of federal funds sold approximates estimated market value.

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Available-for-sale and restricted equity 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. The carrying values of restricted equity securities approximate fair values, based on the redemption provisions of the entities.

Loans receivable: For variable-rate loans that re-price 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.

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 its 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 March 31, 2011 and December 31, 2010, 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 March 31, 2011 and December 31, 2010:

(Dollars in Thousands)	March 31, 2011				December 31, 2010
	Carrying		Approximate		Carrying		Approximate
	Amounts		Fair Values		Amounts		Fair Values
Financial assets
Cash and due from banks	$	11,619	$	11,619	$	4,479	$	4,479
Federal funds sold		10,927		10,927		20,876		20,876
Securities available-for-sale		57,083		57,083		51,603		51,603
Loans, net		259,096		256,343		258,878		256,127
Accrued income		1,169		1,169		1,222		1,222
Derivative assets		260		260		301		301
Financial liabilities
Total deposits		304,999		305,750		300,493		301,233
Short term borrowings		373		373		281		281
FHLB borrowings		19,650		20,400		21,350		22,246
Accrued interest payable		782		782		766		766
Derivative liabilities		260		260		301		301

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

Forward-looking Statements

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

The Company’s forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit, loan, and investment products and other financial services; changes in real estate values; changes in the quality or composition of the Company’s loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Company’s ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties. The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2010. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.

In May 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. All applicable share and per share data in this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively adjusted to give effect to this stock split.

Our Business

HomeTown Bankshares provides a full complement of consumer and commercial banking services to its primary service area which includes the City of Roanoke, Roanoke County, Christiansburg, and Salem, Virginia and contiguous counties, including Bedford and Franklin, 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. In addition to its main office, the Company has offices in Franklin County, Virginia at Westlake, in Roanoke County at the intersection of Colonial Avenue and Virginia Route 419, Virginia and in the City of Roanoke at 3521 Franklin Road.

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

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 of the Notes to Financial Statements in the Annual Report for the year ended December 31, 2010. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses.

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

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

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Discussion of Operations

Three Months Ended March 31, 2011

The Company had net income of $262 thousand for the three months ended March 31, 2011 compared with net income of $255 thousand for the three months ended March 31, 2010. After accumulated dividends on preferred stock of $151 thousand in 2011, the company had net income available to common shareholders of $.03 per share, compared with $.03 per share in 2010.

The $7 thousand improvement in the net income position is due mainly to improved net interest income, which increased from $2.5million in the first three months of 2010 to $2.7 million for the same period in 2011, or 10%. This increase in net interest income is due to the overall growth in the volume of earning assets and improvement in the net interest margin from 3.13% in 2010 to 3.29% in 2011. Total average earning assets increased by $18.6 million to $338 million for the quarter ended March 31, 2011 compared to the same period in 2010, an increase in the volume of earning assets of 5.8%. In the first three months of 2011, noninterest income decreased $75 thousand to $182 thousand from $257 thousand for the same period in 2010, a decrease of 29%. The decrease in noninterest income is mainly attributed to a $77 thousand gain on a sale of other real estate in 2010. An $18 thousand decrease in service charges on deposits was largely offset set by a $7 thousand increase in mortgage loan brokerage fees and a $6 thousand increase in other income.

The provision for loan losses was $248 thousand for the first three months of 2011 compared to $353 thousand for the same period in 2010. The allowance for loan losses was increased significantly in the second and fourth quarters of 2010. The $105 thousand decrease in the provision for the first three months of 2011 compared to the same period in 2010 is due to decreased specific reserves on impaired loans of $37 thousand since year end 2010. Lower general reserves since year end were also a factor in the lower provision and were calculated by dividing the remaining loan portfolio into 30 homogeneous pools, each with its unique degree of inherent risk. These pools are detailed in the allowance for loan loss calculation and are applied a loss percentage. 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.

Noninterest expense increased $305 thousand for the three months ended on March 31, 2011 when compared to the same period in 2010. FDIC insurance assessment expense increased $64 thousand, or 51% to $189 thousand for the three months ended on March 31, 2011 when compared to the same period in 2010. This increase was due to the growth in total deposits from 2010 to 2011 along with an increase in the FDIC insurance rate. Salaries and employee benefits increased $104 thousand, or 9.4% mainly attributable to additional staff in 2011 compared to 2010. Additional staffing was added to increase the resources available to manage the collection of non performing assets. Occupancy and equipment expense increased from $311 thousand to $332 thousand, an increase of 6.8%. Data processing expense increased from $105 thousand in the first three months of 2010 to $137 thousand for the same period in 2011, an increase of $32 thousand or 31%. This increase in data processing costs is attributed to the growth of the Company and the addition of new online banking capabilities and other core system enhancements. Professional fees increased $25 thousand or 32% over the same period last year. The increase was due to higher legal fees associated with the collection of non performing loans. Other expense increased $59 thousand or 20% for the three months ended March 31, 2011 compared to the same period in 2010.

Financial Condition

At March 31, 2011, the Company had total assets of $357 million compared to $353 million at December 31, 2010. Total assets increased $11.2 million or 1.1% since year end 2010. At March 31, 2011, assets were comprised principally of loans, cash and due from banks, federal funds sold, and investment securities. Net loans totaled $259 million at March 31, 2011, and were up $218 thousand from year end 2010. Federal funds sold decreased to $10.9 million from $20.9 million at December 31, 2010. Investment securities increased $5.5 million to $57.1 million at the end of the first quarter of 2011.

The Company’s liabilities at March 31, 2011 totaled $327 million compared to $323 million at December 31, 2010, an increase of $3.2 million or 1% Noninterest-bearing deposits increased by $4.1 million, while interest-bearing deposits were up $376 thousand to $283 million at March 31, 2011.

At March 31, 2011 and December 31, 2010, the Company had stockholders’ equity of $30.3 million and $29.7 million, respectively, an increase of $619 thousand or 2.1%. Changes to stockholders’ equity in the first quarter included net income of $262 thousand and an increase in the market value of investment securities available for sale of $346 thousand which increased stockholders’ equity. Stock awarded to executives increased stockholder’s equity an additional $11 thousand.

On September 18, 2009, as part of the Troubled Asset Relief Program-Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement with the United States Department of the Treasury pursuant to which the Company issued 10 thousand shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A for a purchase price of $10 million in cash and issued a warrant to purchase 374.37437 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B for a per share price of $1.00 per share, which was exercised immediately.

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Management believes the Company has sufficient capital to fund its operations. At March 31, 2011, 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

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 no loans past due ninety days or more and still accruing interest and 14 nonaccrual loans totaling $6.0 million as well as $4.1 million of other real estate owned at March 31, 2011.

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.

Specific loss reserves for loans individually evaluated for impairment totaled $1,485,000 at March 31, 2011 compared to $1,522,000 at December 31, 2010, a decrease of $37 thousand. Impaired loans declined $7.1 million from $26.8 million at December 31, 2010 to $19.7 million at March 31, 2011. This decrease in the level of impaired loans was due primarily to foreclosure on properties securing impaired loans totaling $1.1 million in the first quarter of 2011 and the upgrading of three loans to one borrower totaling $4.8 million. The loans to this borrower were past due at December 31, 2010 but were paid current in the first quarter. The loans are secured by rental properties and rent payments have been directed to a lockbox arrangement under the control of the Bank. General loss reserves totaled $3.6 million at March 31, 2011 compared to $3.7 million at December 31, 2010. Based on the general reserves established on loans collectively evaluated for impairment and the specific reserves for loans individually evaluated for impairment, the Company recorded a provision for loan losses of $248 thousand in the first quarter of 2011 compared to $353 thousand in the same quarter of 2010. Based on this evaluation, the percentage of the allowance for loan losses to total loans was 1.92% at March 31, 2011 and 1.98% at December 31, 2010.

Liquidity

Liquidity represents the ability to meet present and future financial obligations through either the sale or maturity of existing assets or with borrowings from correspondent banks or other deposit markets. Liquid assets include cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, investment securities and loans 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 that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ borrowing needs.

At March 31, 2011, cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, loans maturing within one year, and expected maturities, calls and principal repayments from the securities portfolio within one year totaled $96.9 million. At March 31, 2011, 27% or $70.7 million of the loan portfolio would mature within one year. At March 31, 2011, non-deposit sources of available funds totaled $17.6 million, which included $4.5 million immediately available from FHLB. During the first three months of 2011, other borrowing activity included a principal pay down of $1.7 million of FHLB borrowings compared to $450 thousand during the same period last year.

Capital Requirements

The maintenance of appropriate levels of capital is a priority and is continually monitored. Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Quantitative measures established by regulations to ensure capital adequacy require the Company to maintain minimum capital ratios. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. The following are the Company’s and Bank’s capital ratios:

(in thousands except for percentages)	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2011
Total Capital (to Risk-Weighted Assets)
Consolidated	$	33,531		12.5	%	$	21,467		8.0	%		N/A		N/A
HomeTown Bank	$	31,329		11.7	%	$	21,467		8.0	%	$	26,834		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	$	30,209		11.3	%	$	10,734		4.0	%		N/A		N/A
HomeTown Bank	$	28,007		10.4	%	$	10,734		4.0	%	$	16,100		6.0	%
Tier I Capital (to Average Assets)
Consolidated	$	30,209		8.5	%	$	14,187		4.0	%		N/A		N/A
HomeTown Bank	$	28,007		7.9	%	$	14,187		4.0	%	$	17,734		5.0	%

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Financial Instruments With Off-Balance-Sheet Risk

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

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

At March 31, 2011 outstanding commitments to extend credit including letters of credit were $37.9 million. There are no commitments to extend credit on impaired loans.

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

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting”, which requires companies to submit financial statements in XBRL (extensible business reporting language)format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

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In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures, the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (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.

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 March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Not applicable to smaller reporting companies.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

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Item 6. Exhibits

(a) Exhibits

Exhibit No.
3.1	Certificate of Amendment and Articles of Amendment for the Series A Preferred Stock, incorporated herein by reference to Exhibit 3.1 to Form 8-K filed September 24, 2009.
3.2	Certificate of Amendment and Articles of Amendment for the Series B Preferred Stock, incorporated herein by reference to Exhibit 3.1 to Form 8-K filed September 24, 2009.
4.1	Form of Certificate for the Series A Preferred Stock, incorporated herein by reference to Exhibit 4.1 to Form 8-K filed September 24, 2009.
4.2	Form of Certificate for the Series B Preferred Stock, incorporated herein by reference to Exhibit 4.2 to Form 8-K filed September 24, 2009.
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.
31.1	Certification of Chief Executive of Officer (302 Certification).
31.2	Certification of Chief Financial Officer (302 Certification).
32	Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).

* Denotes management contract

Reports on form 8-K

On January 28, 2011, the Company announced its earnings for the year ended December 31, 2010.

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SIGNATURES

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

HOMETOWN BANK
Date: May 16, 2011	By:	/S/    SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer
Date: May 16, 2011	By:	/S/    CHARLES W. MANESS, JR.
		Charles W. Maness, Jr.
		Executive Vice President
		Chief Financial Officer

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HOMETOWN BANK

FORM 10Q

INDEX TO EXHIBITS

Exhibit	Description
3.1	Certificate of Amendment and Articles of Amendment for the Series A Preferred Stock, incorporated herein by reference to Exhibit 3.1 to Form 8-K filed September 24, 2009.
3.2	Certificate of Amendment and Articles of Amendment for the Series B Preferred Stock, incorporated herein by reference to Exhibit 3.1 to Form 8-K filed September 24, 2009.
4.1	Form of Certificate for the Series A Preferred Stock, incorporated herein by reference to Exhibit 4.1 to Form 8-K filed September 24, 2009.
4.2	Form of Certificate for the Series B Preferred Stock, incorporated herein by reference to Exhibit 4.2 to Form 8-K filed September 24, 2009.
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.
31.1	Certification of Chief Executive of Officer (302 Certification).
31.2	Certification of Chief Financial Officer (302 Certification).
32	Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).

* Denotes management contract