HomeTown Bankshares (HMTA) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended June 30, 2013.

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  ☒    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	☒

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

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

As of August 13, 2013, 3,270,299 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 June 30, 2013 and December 31, 2012		3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012		4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012		5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012		6
Notes to Consolidated Financial Statements		7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
Item 4.	CONTROLS AND PROCEDURES	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosure	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
SIGNATURES		27

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

2

HOMETOWN BANKSHARES CORPORATION

Consolidated Balance Sheets

June 30, 2013 and December 31, 2012

In Thousands, Except Share and Per Share Data	June 30, 2013			December 31, 2012
	(Unaudited)
Assets
Cash and due from banks	$	27,665		$	9,812
Federal funds sold		56			196
Securities available for sale, at fair value		59,406			63,466
Restricted equity securities, at cost		2,386			2,591
Loans, net of allowance for loan losses of $3,660 in 2013 and $3,790 in 2012		278,990			271,147
Property and equipment, net		10,756			9,754
Other real estate owned, net of valuation allowance of $703 in 2013 and $575 in 2012		8,440			8,938
Deferred tax asset, net		1,623			1,338
Accrued income		1,781			1,590
Other assets		758			1,619
Total assets	$	391,861		$	370,451
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	35,725		$	32,627
Interest-bearing		285,960			277,370
Total deposits		321,685			309,997
Short term borrowings		361			216
Federal Home Loan Bank borrowings		19,000			22,000
Accrued interest payable		295			332
Other liabilities		1,026			1,187
Total liabilities		342,367			333,732
Commitments and contingencies		-			-
Stockholders’ Equity:
Preferred stock, $1.00 par value; Series A 10,000 shares and Series B 374 shares authorized, issued and outstanding at June 30, 2013 and December 31, 2012		10,374			10,374
Preferred stock, no par value; Series C 14,000 shares authorized, issued and outstanding at June 30, 2013 and no shares at December 31, 2012		13,300			-
Discount on preferred stock		(102	)		(142	)
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,270,299 (includes 27,846 restricted shares) at June 30, 2013, and 3,262,518 (includes 25,896 restricted shares) at December 31, 2012		16,351			16,167
Surplus		15,320			15,487
Retained deficit		(5,727	)		(6,587	)
Accumulated other comprehensive (loss) income		(22	)		1,420
Total stockholders’ equity		49,494			36,719
Total liabilities and stockholders’ equity	$	391,861		$	370,451

See Notes to Consolidated Financial Statements

3

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2013 and 2012

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2013		2012			2013		2012
In Thousands, Except Share and Per Share Data	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Interest income:
Loans and fees on loans	$	3,575	$	3,431		$	7,050	$	6,809
Taxable investment securities		359		439			691		911
Nontaxable investment securities		40		9			63		12
Dividends on restricted stock		23		21			48		39
Other interest income		11		12			21		27
Total interest income		4,008		3,912			7,873		7,798
Interest expense:
Deposits		467		581			943		1,221
Preferred stock dividends		-		-			-		38
Other borrowed funds		93		97			187		212
Total interest expense		560		678			1,130		1,471
Net interest income		3,448		3,234			6,743		6,327
Provision for loan losses		-		1,088			125		1,278
Net interest income after provision for loan losses		3,448		2,146			6,618		5,049
Noninterest income:
Service charges on deposit accounts		82		64			150		138
ATM and interchange income		79		63			153		110
Mortgage loan brokerage fees		83		78			163		152
Gains on sales of investment securities		106		127			108		127
Other income		103		74			196		141
Total noninterest income		453		406			770		668
Noninterest expense:
Salaries and employee benefits		1,341		1,138			2,717		2,365
Occupancy and equipment expense		321		310			641		635
Data processing expense		94		168			285		335
Advertising and marketing expense		125		77			265		197
Professional fees		161		105			297		194
Bank franchise taxes		50		33			101		69
FDIC insurance expense		129		122			271		243
Loss on sales and writedowns of other real estate owned		349		32			351		35
Other real estate owned expense		49		72			101		177
Directors’ fees		57		61			110		117
Other expense		263		295			500		553
Total noninterest expense		2,939		2,413			5,639		4,920
Net income before income taxes		962		139			1,749		797
Income tax expense (benefit)		320		44			582		(2,658	)
Net income		642		95			1,167		3,455
Effective dividends on preferred stock		134		134			267		267
Accretion of discount on preferred stock		20		18			40		37
Net income (loss) available to common shareholders	$	488	$	(57	)	$	860	$	3,151
Basic earnings (loss) per common share	$	0.15	$	(0.02	)	$	0.26	$	0.97
Diluted earnings (loss) per common share	$	0.15	$	(0.02	)	$	0.26	$	0.97
Weighted average common shares outstanding		3,270,299		3,262,518			3,267,806		3,256,296
Diluted average common shares outstanding		3,344,145		3,262,518			3,304,933		3,256,296

See Notes to Consolidated Financial Statements

4

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Six Months ended June 30, 2013 and 2012

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
In Thousands	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net income	$	642		$	95		$	1,167		$	3,455
Other comprehensive income (loss), net of deferred taxes
Net unrealized holding (losses) gains on securities available for sale during the period		(1,814	)		480			(2,068	)		798
Less: reclassification adjustment for gains included in net income		70			84			71			84
Net securities (losses) gains during the period		(1,884	)		396			(2,139	)		714
Deferred income tax benefit (expense) on unrealized holding (losses) gains on securities available for sale		653			(120	)		734			(595	)
Tax related to realized gain on securities sold		(36	)		(43	)		(37	)		(43	)
Total other comprehensive (loss) income		(1,267	)		233			(1,442	)		76
Comprehensive (loss) income	$	(625	)	$	328		$	(275	)	$	3,531

See Notes to Consolidated Financial Statements

5

HOMETOWN BANKSHARES CORPORATION

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2013 and 2012

	For the Six Months Ended June 30,
In Thousands	2013			2012
Cash flows from operating activities:	(Unaudited)			(Unaudited)
Net income	$	1,167		$	3,455
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		262			259
Provision for loan losses		125			1,278
Amortization of premium on securities, net		339			361
Loss on sales and writedowns of other real estate, net		351			35
Gains on sales of investment securities		(108	)		(127	)
Gains on disposals of fixed assets		(4	)		-
Stock compensation expense		17			14
Changes in assets and liabilities:
Deferred tax asset, net		512			(2,926	)
Accrued income		(191	)		(53	)
Other assets		798			(50	)
Accrued interest payable		(37	)		(36	)
Other liabilities		(161	)		113
Net cash flows provided by operating activities		3,070			2,323
Cash flows from investing activities:
Net decrease (increase) in federal funds sold		140			(426	)
Purchases of investment securities		(10,034	)		(14,617	)
Sales, maturities, and calls of available for sale securities		11,687			15,192
Redemption (purchase) of restricted equity securities, net		205			(49	)
Net increase in loans		(9,581	)		(13,903	)
Proceeds from sales of other real estate		1,760			708
Purchases of property and equipment		(1,266	)		(200	)
Proceeds from disposals of property and equipment		6			-
Net cash flows used in investing activities		(7,083	)		(13,295	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		3,098			5,636
Net increase in interest-bearing deposits		8,590			6,476
Net increase in short-term borrowings		145			16
Net decrease in long-term FHLB borrowings		(3,000	)		-
Preferred stock issue, net		13,300			-
Preferred stock dividend payment		(267	)		(1,067	)
Net cash flows provided by financing activities		21,866			11,061
Net increase in cash and cash equivalents		17,853			89
Cash and cash equivalents, beginning		9,812			12,529
Cash and cash equivalents, ending	$	27,665		$	12,618
Supplemental disclosure of cash flow information:
Cash payments for interest	$	1,167		$	1,507
Cash payments for income taxes	$	30		$	-
Supplemental disclosure of noncash investing activities:
Unrealized (loss) gain on securities available for sale	$	(2,139	)	$	714
Transfer from loans to other real estate	$	1,613		$	69

See Notes to Consolidated Financial Statements

6

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 June 30, 2013 and for the periods ended June 30, 2013 and 2012 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

Management believes that all interim adjustments for the period ended June 30, 2013 are of a normal recurring nature. The first quarter of 2012 included the recognition of cumulative deferred tax assets. The amount of the net tax benefit recognized in the first quarter was a non-recurring, cumulative adjustment that included the net tax benefit generated from years prior to 2012. Management believes that all other interim adjustments for 2012 were of a normal recurring nature. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for such interim periods. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2012, included in the Company’s Form 10-K for the year ended December 31, 2012. Interim results are not necessarily indicative of results for a full year.

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

The consolidated financial statements 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. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

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.

Beginning with the first quarter of 2013, the Company changed the methodology of how historical loss rates were analyzed in thecalculation of the allowance for loan losses. The revised calculation and application of historical loss rates impacted the calculationof the allowance for loan losses. Under the former methodology, the previous two calendar years and an annualized current calendaryear of losses were analyzed and applied to the loans collectively evaluated for impairment. The former calculation would haveresulted in a total allocation of $1,990,000. Under the revised methodology, a rolling three years of losses are analyzed and appliedto the loans collectively evaluated for impairment, resulting in an allocation of $2,116,000. Consistent with accounting guidance,prior periods have not been restated and are shown as originally published using the segments and classes in effect for the period.

7

Note 2. Investment Securities

The amortized cost and fair value of securities available for sale as of June 30, 2013 and December 31, 2012, are as follows:

(Dollars In Thousands)	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	28,675	$	599	$	(240	)	$	29,034
Mortgage-backed securities		16,325		196		(147	)		16,374
Municipal securities		14,439		281		(722	)		13,998
	$	59,439	$	1,076	$	(1,109	)	$	59,406

(Dollars In Thousands)	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	28,825	$	1,049	$	(32	)	$	29,842
Mortgage-backed securities		21,533		486		(35	)		21,984
Municipal securities		10,965		698		(23	)		11,640
	$	61,323	$	2,233	$	(90	)	$	63,466

U.S. Government and federal agency securities.The unrealized losses on 13 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 June 30, 2013.

Mortgage-backed securities.The unrealized losses in 7 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, 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 June 30, 2013.

Municipal securities.The unrealized losses on the Company’s 21 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 June 30, 2013.

The following tables demonstrate the unrealized loss position of securities available for sale at June 30, 2013 and December 31, 2012.

		June 30, 2013
		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	$	6,429	$	(234	)	$	1,614	$	(6	)	$	8,043	$	(240	)
Mortgage-backed securities		5,488		(147	)		-		-			5,488		(147	)
Municipal securities		7,026		(699	)		213		(23	)		7,239		(722	)
	$	18,943	$	(1,080	)	$	1,827	$	(29	)	$	20,770	$	(1,109	)

		December 31, 2012
		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	$	-	$	-	$	3,400	$	(32	)	$	3,400	$	(32	)
Mortgage-backed securities		-		-		3,701		(35	)		3,701		(35	)
Municipal securities		-		-		1,595		(23	)		1,595		(23	)
	$	-	$	-	$	8,696	$	(90	)	$	8,696	$	(90	)

There were 41 debt securities with fair values totaling $20.8 million considered temporarily impaired at June 30, 2013.  As of June 30, 2013, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

The Company realized gains on sales of securities of $108 thousand for the first six months of 2013 compared to $127 thousand for the same period last year.

8

The amortized cost and estimated fair values of investment securities available for sale at June 30, 2013, by contractual maturity are as follows:

(Dollars In Thousands)	Amortized Cost		Estimated Fair Value
One year or less	$	-	$	-
Over one through five years		594		605
Over five through ten years		13,962		14,105
Greater than 10 years		44,883		44,696
	$	59,439	$	59,406

 Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at June 30, 2013 and December 31, 2012 were as follows:

(Dollars In Thousands)	June 30, 2013			December 31, 2012
Construction loans:
Residential	$	6,676		$	5,036
Land acquisition, development & commercial		18,148			20,198
Real estate:
Residential		67,422			69,691
Commercial		124,176			109,302
Commercial, Industrial & agricultural		37,218			42,382
Equity lines		19,668			20,504
Consumer		9,342			7,824
Total		282,650			274,937
Less allowance for loan losses		(3,660	)		(3,790	)
Loans, net	$	278,990		$	271,147

The past due and nonaccrual status of loans as of June 30, 2013 was as follows:

(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	6,676	$	6,676	$	-
Land acquisition, development & commercial		-		-		62		62		18,086		18,148		62
Real estate:
Residential		482		-		446		928		66,494		67,422		928
Commercial		-		-		-		-		124,176		124,176		-
Commercial, Industrial & agricultural		-		28		-		28		37,190		37,218		173
Equity lines		173		60		-		233		19,435		19,668		60
Consumer		-		4		-		4		9,338		9,342		-
Total	$	655	$	92	$	508	$	1,255	$	281,395	$	282,650	$	1,223

The past due and nonaccrual status of loans as of December 31, 2012 was as follows:

(Dollars In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	5,036	$	5,036	$	-
Land acquisition, development & commercial		-		723		1,034		1,757		18,441		20,198		1,756
Real estate:
Residential		-		562		184		746		68,945		69,691		582
Commercial		-		-		236		236		109,066		109,302		236
Commercial, Industrial & agricultural		-		157		-		157		42,225		42,382		-
Equity lines		60		-		115		175		20,329		20,504		115
Consumer		-		-		-		-		7,824		7,824		-
Total	$	60	$	1,442	$	1,569	$	3,071	$	271,866	$	274,937	$	2,689

There were no loans past due ninety days or more and still accruing at June 30, 2013 or December 31, 2012.

9

 Impaired loans and the related allowance at June 30, 2013, were as follows:

June 30, 2013 With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	-
Land acquisition, development & commercial		1,915		1,975		-		1,921		49
Real estate:
Residential		268		414		-		420		10
Commercial		9,377		9,376		-		9,393		243
Commercial, Industrial & agricultural		605		605		-		1,124		38
Equity lines		-		-		-		-		-
Consumer		-		-		-		-		-
Total loans with no allowance	$	12,165	$	12,370	$	-	$	12,858	$	340

June 30, 2013 With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	-
Land acquisition, development & commercial		-		-		-		-		-
Real estate:
Residential		439		439		126		440		10
Commercial		-		-		-		-		-
Commercial, Industrial & agricultural		-		-		-		-		-
Equity lines		-		-		-		-		-
Consumer		-		-		-		-		-
Total loans with an allowance	$	439	$	439	$	126	$	440	$	10

Impaired loans and the related allowance at December 31, 2012 were as follows:

December 31, 2012 With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	-
Land acquisition, development & commercial		3,632		3,692		-		3,647		187
Real estate:
Residential		611		611		-		611		23
Commercial		9,018		9,018		-		9,018		440
Commercial, Industrial & agricultural		916		916		-		916		33
Equity lines		115		439		-		115		-
Consumer		-		-		-		-		-
Total loans with no allowance	$	14,292	$	14,676	$	-	$	14,307	$	683

10

December 31, 2012 With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction loans:
Residential	$	-	$	-	$	-	$	-	$	-
Land acquisition, development & commercial		-		-		-		-		-
Real estate:
Residential		199		199		137		199		13
Commercial		1,139		1,139		71		1,139		74
Commercial, Industrial & agricultural		-		-		-		-		-
Equity lines		-		-		-		-		-
Consumer		-		-		-		-		-
Total loans with an allowance	$	1,338	$	1,338	$	208	$	1,338	$	87

Troubled Debt Restructurings

Included in certain loan categories are troubled debt restructurings (“TDRs”). At June 30, 2013 and at December 31, 2012, there were 3 loans classified as TDRs totaling $6.4 million and $6.5 million, respectively. One TDR was classified as a substandard non-accruing loan at June 30, 2013 and at the end of 2012. This loan was restructured in the twelve months ended June 30, 2013, and became past due in the quarter ended June 30, 2013. As a result of this default, a partial charge off of $145 thousand was recorded in the second quarter of 2013. The outstanding balance of this loan was $42 thousand and $199 thousand at June 30, 2013 and December 31, 2012, respectively. There was no valuation allowance related to total TDR’s at June 30, 2013. The valuation allowance related to total TDRs was $137 thousand at December 31, 2012.

For the six months ended June 30, 2013, no loans were modified as a TDR.

The following table presents by class of loan, information related to loans modified during the year ended December 31, 2012.

	Loans modified as TDR's For the year ended December 31, 2012
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Construction loans:
Residential		-	$	-	$	-
Land acquisition, development & commercial		-		-		-
Real estate:		-		-		-
Residential		1		202		202
Commercial		-		-		-
Commercial, Industrial & agricultural		-		-		-
Equity lines		-		-		-
Consumer		-		-		-
Total Loans		1	$	202	$	202

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, the specific reserve associated with the loan may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.

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Note 4. Allowance for Loan Losses

The following table presents, as of June 30, 2013, 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).

June 30, 2013	Allowance for loan losses																Loans
Class of Loan In thousands of dollars	Beginning balance		Charge- offs			Recoveries		Provisions			Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment
Construction loans:
Residential	$	117	$	-		$	-	$	20		$	137	$	-	$	137	$	6,676	$	-	$	6,676
Land acquisition, development & commercial		811		-			-		(312	)		499		-		499		18,148		1,915		16,233
Real estate:
Residential		725		(446	)		55		555			889		126		763		67,422		707		66,715
Commercial		1,054		(88	)		251		19			1,236		-		1,236		124,176		9,377		114,799
Commercial, Industrial & agricultural		459		(27	)		-		(153	)		279		-		279		37,218		605		36,613
Equity lines		386		-			2		(90	)		298		-		298		19,668		-		19,668
Consumer		145		(2	)		-		(82	)		61		-		61		9,342		-		9,342
Unallocated		93		-			-		168			261		-		261		-		-		-
Total	$	3,790	$	(563	)	$	308	$	125		$	3,660	$	126	$	3,534	$	282,650	$	12,604	$	270,046

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The following table presents, as of December 31, 2012, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

December 31, 2012	Allowance for loan losses																Loans
Class of Loan In thousands of dollars	Beginning balance		Charge- offs			Recoveries		Provisions			Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Ending balance		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment
Construction loans:
Residential	$	90	$	-		$	-	$	27		$	117	$	-	$	117	$	5,036	$	-	$	5,036
Land acquisition, development & commercial		953		(519	)		-		377			811		-		811		20,198		3,632		16,566
Real estate:
Residential		538		(151	)		-		338			725		137		588		69,691		810		68,881
Commercial		1,314		(478	)		18		200			1,054		71		983		109,302		10,157		99,145
Commercial, Industrial & agricultural		628		(71	)		-		(98	)		459		-		459		42,382		916		41,466
Equity lines		313		(393	)		-		466			386		-		386		20,504		115		20,389
Consumer		143		(4	)		1		5			145		-		145		7,824		-		7,824
Unallocated		-		-			-		93			93		-		93		-		-		-
Total	$	3,979	$	(1,616	)	$	19	$	1,408		$	3,790	$	208	$	3,582	$	274,937	$	15,630	$	259,307

Loans by credit quality indicators as of June 30, 2013 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	6,676	$	-	$	-	$	-	$	6,676
Land acquisition, development & commercial		16,536		-		1,550		62		18,148
Real estate:
Residential		61,864		4,404		226		928		67,422
Commercial		118,681		2,439		3,056		-		124,176
Commercial, Industrial & agricultural		36,382		114		549		173		37,218
Equity lines		19,608		-		-		60		19,668
Consumer		9,342		-		-		-		9,342
Total	$	269,089	$	6,957	$	5,381	$	1,223	$	282,650

Loans by credit quality indicators as of December 31, 2012 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	5,036	$	-	$	-	$	-	$	5,036
Land acquisition, development & commercial		16,479		-		1,963		1,756		20,198
Real estate:
Residential		63,299		5,581		229		582		69,691
Commercial		103,010		2,479		3,577		236		109,302
Commercial, Industrial & agricultural		41,313		131		938		-		42,382
Equity lines		20,364		25		-		115		20,504
Consumer		7,824		-		-		-		7,824
Total	$	257,325	$	8,216	$	6,707	$	2,689	$	274,937

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At June 30, 2013 and December 31, 2012, the Company had no loans classified as Loss.

Note 5. Foreclosed Properties

Changes in foreclosed properties for the six months ended June 30, 2013 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	9,513		$	(575	)	$	8,938
Additions		1,613			-			1,613
Writedowns		-			(351	)		(351	)
Sales		(1,983	)		223			(1,760	)
Balance at the end of period	$	9,143		$	(703	)	$	8,440

Changes in foreclosed properties for the six months ended June 30, 2012 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	9,893		$	(331	)	$	9,562
Additions		69			-			69
Writedowns		-			-			-
Sales		(918	)		175			(743	)
Balance at the end of period	$	9,044		$	(156	)	$	8,888

The major classifications of other real estate owned in the consolidated balance sheets at June 30, 2013 and December 31, 2012 were as follows:

(Dollars In Thousands)	June 30, 2013		December 31, 2012
Construction loans:
Residential	$	-	$	588
Land acquisition, development & commercial		4,331		3,591
Real estate:
Residential		-		182
Commercial		2,663		2,905
Commercial, Industrial & agricultural		1,164		1,164
Equity lines		282		508
	$	8,440	$	8,938

Note 6. 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 435,710 shares of authorized common stock have been issued under the Plan and 114,290 shares of authorized common stock are available for issue under the Plan. There are options for 435,710 shares granted currently outstanding as of June 30, 2013, of which, all 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 June 30, 2013, no options have been exercised. The Company recorded compensation expense of $17 thousand for the six months ended June 30, 2013 and $14 thousand for the six months ended June 30, 2012. The aggregate intrinsic value of outstanding stock options was $0 at June 30, 2013. The weighted average remaining contractual term of outstanding options was 2.87 years at June 30, 2013. No options were granted in the six months ended June 30, 2013 or 2012.

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 Company’s Board of Directors at 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. 

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The restrictions attached to stock issued under the Plan provide for vesting over a five-year period. During the first quarter of 2013, the Company issued 7,781 shares of stock under the Plan, and in the same period of 2012, the Company issued 20,971 shares of stock under the Plan. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	For the six months ended June 30, 2013					For the six months ended June 30, 2012
	Shares			Weighted-Average Grant Date Fair Value		Shares			Weighted-Average Grant Date Fair Value
Nonvested at beginning of year		25,896		$	4.76		6,566		$	7.16
Granted		7,781			5.98		20,971			4.20
Vested		(5,831	)		5.03		(1,641	)		7.16
Cancelled		-			-		-			-
Nonvested at the end of the period		27,846		$	5.05		25,896		$	4.76

The remaining unamortized compensation expense for restricted stock was $126 thousand at June 30, 2013 and will be recognized over the next 4.67 years. All compensation expense for stock options has been recognized.

Note 7. Fair Value Measurement

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

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

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

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

The following describes the valuation techniques used by the Company to measure certain 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 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 considers observable market data (Level 2).

15

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

(Dollars In Thousands)			Carrying value at June 30, 2013
Description	Balance as of June 30, 2013		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	$	29,034		$	29,034
Mortgaged-backed securities		16,374			16,374
Municipal securities		13,998			13,998

(Dollars In Thousands)			Carrying value at December 31, 2012
Description	Balance as of December 31, 2012		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	$	29,842		$	29,842
Mortgaged-backed securities		21,984			21,984
Municipal securities		11,640			11,640
Derivative assets		67			67
Liabilities:
Derivative liabilities	$	67		$	67

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 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: The Company does not record loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and a specific reserve is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the extent of any loss. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraisal value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

 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.

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The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of June 30, 2013 and December 31, 2012.

(Dollars In Thousands)			Carrying value at June 30, 2013
Description	Balance as of June 30, 2013		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	$	313	$	-	$	-	$	313
Other real estate owned, net of valuation allowance		8,440		-		6,447		1,993

(Dollars In Thousands)			Carrying value at December 31, 2012
Description	Balance as of December 31, 2012		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	$	1,130	$	-	$	62	$	1,068
Other real estate owned, net of valuation allowance	$	8,938		-		4,382		4,556

At June 30, 2013 and December 31, 2012, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following tables display quantitative information about Level 3 Fair Value Measurements for June 30, 2013 and December 31, 2012:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for June 30, 2013
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	313	Discounted appraised value	Selling cost		10%	-	10%	(10%)
				Discount for lack of marketability and age of appraisal		41%	-	41%	(41%)
Other real estate owned	$	1,458	Discounted appraised value	Selling cost		6%	-	6%	(6%)
				Discount for lack of marketability and age		4%	-	4%	(4%)
	$	535	Internal evaluations	Internal evaluations		0%	-	31%	(4%)

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2012
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	1,068	Discounted appraised value	Selling cost		6%	-	10%	(10%)
				Discount for lack of marketability and age of appraisal		0%	-	10%	(7%)
Other real estate owned	$	2,177	Discounted appraised value	Selling cost		6%	-	10%	(10%)
				Discount for lack of marketability and age		0%	-	30%	(1%)
	$	2,379	Internal evaluations	Internal evaluations		10%	-	50%	(13%)

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 June 30, 2013 and December 31, 2012, management believes the carrying value of federal funds sold approximates estimated market value.

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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 June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012:

(Dollars In Thousands)			Fair value at June 30, 2013
Description	Carrying value as of June 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	27,665	$	27,665					$	27,665
Federal funds sold		56		56						56
Securities available-for-sale		59,406				59,406				59,406
Restricted equity securities		2,386				2,386				2,386
Loans, net		278,990						280,877		280,877
Accrued income		1,781				1,781				1,781
Financial liabilities
Total deposits		321,685		191,955		130,169				322,124
Short term borrowings		361		361						361
FHLB borrowings		19,000				19,613				19,613
Accrued interest payable		295				295				295

18

(Dollars In Thousands)			Fair value at December 31, 2012
Description	Carrying value as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	9,812	$	9,812					$	9,812
Federal funds sold		196		196						196
Securities available-for-sale		63,466				63,466				63,466
Restricted equity securities		2,591				2,591				2,591
Loans, net		271,147						272,981		272,981
Accrued income		1,590				1,590				1,590
Derivative assets		67				67				67
Financial liabilities
Total deposits		309,997		175,325		135,128				310,453
Short term borrowings		216		216						216
FHLB borrowings		22,000				22,862				22,862
Accrued interest payable		332				332				332
Derivative liabilities		67				67				67

Note 8. Capital Transaction

On June 28, 2013 HomeTown Bankshares Corporation completed a $14,000,000 private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated April 17, 2013, the Company sold 14,000 shares of its 6.0% Series C NonCumulative Perpetual Convertible Preferred Stock at a price of $1,000 per share. The convertible preferred stock pays quarterly dividends equivalent to six percent (6%) per annum, and is convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment.

The Company plans to use the net proceeds from this offering to redeem the $10,374,000 of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A and Series B and to support future growth and for general corporate purposes.

Note 9. Reclassifications Out of Other Comprehensive Income

Items not reclassified in their entirety to net income for the six months ended June 30, 2013 and 2012 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Six Months Ended June 30,				Affected Line Item in the Statement Where Net Income is Presented
In Thousands	2013		2012
	(Unaudited)		(Unaudited)
Available for sale securities
Realized gain on sale of securities held for sale during the period	$	108	$	127	Gain on sale of investment securities
		37		43	Income tax expense
	$	71	$	84	Net income

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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, 2012. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.

Our Business

HomeTown Bankshares provides a full complement of consumer and commercial banking services to its primary service area which includes the 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 the town of Christiansburg, Virginia at 1540 and 1655 Roanoke Street, in Roanoke County, Virginia at the intersection of Colonial Avenue and Virginia Route 419, and in the City of Roanoke, Virginia 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, 2012. 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

Six Months Ended June 30, 2013

Net income for the first half of 2013 was $1.2 million or $0.26 per diluted common share compared to $3.5 million or $0.97 per diluted common share for same period last year. Net income was less because 2012 included a one-time favorable adjustment of $2.9 million or $0.90 per diluted share for the recognition of cumulative net deferred tax assets since inception through year end 2011. Net income before taxes was $1.7 million for the six months ended June 30, 2013, $952 thousand higher than the same period in 2012. Favorable variances in net interest income, provision for loan losses, and noninterest income were partially offset by higher noninterest expense.

Net interest income for the six months ended June 30, 2013 totaled $6.7 million, an increase of $416 thousand or 6.6% over last year. Higher net interest income resulted from a higher volume of earning assets and an improved margin. Average earning assets were $350 million for the six months ended June 30, 2013 compared to $333 million for the same period last year. The $17 million increase in average earning assets is the primary reason for the increase in net interest income for 2013 compared to 2012. This increase in the volume of earning assets was partially offset by a reduction in the tax equivalent yield on earning assets from 4.71% in 2012 to 4.55% in 2013.

Growth in average loans outstanding accounted for most of the increase in earning assets and was funded primarily by reductions in average available for sale securities of $8 million and increases in average non-interest bearing deposits of $6 million and average interest bearing liabilities of $3 million. These actions resulted in a tax equivalent net interest margin of 3.90% for the first half of 2013, 8 basis points higher than the 3.82% for the first half of 2012. The improved margin resulted primarily from the cost of interest bearing deposits falling 4 basis points more than the yield on interest earning assets. During the 2012, the interest rates paid on interest bearing deposits were lowered to be more consistent with market rates and more in line with the lower rates on loans in the relatively low interest rate environment.

Interest rates have been slightly more volatile in recent weeks as the markets have looked for signs from the Federal Reserve on the timing of when they will begin tapering the bond purchase program which has held interest rates low in an attempt to promote economic growth. This action by the Federal Reserve was effective in lowering interest rates and to counter the resulting low rates on investment securities we channeled cash flow from the investment portfolio into the loan portfolio at higher rates. This shift in the composition of earning assets from investment securities to loans contributed to the improvement in the net interest margin in 2013 compared to 2012. Interest rates increased at the end of the second quarter and we will evaluate this strategy going forward as yields available on investment securities are now higher than they have been in over a year.

The provision for loan losses was $125 thousand for the first half of 2013 compared to $1.3 million for the same period in 2012. Recoveries of $308 thousand during the first six months of 2013 replenished the allowance for loan losses and lowered the amount of current year provision expense. Improvements in loan quality also contributed to a lower provision. The allowance for loan losses as a percent of nonaccrual loans was 299.3% at the end of the second quarter of 2013 compared to 122.8% at the end of the same quarter a year ago. The favorable change in this ratio resulted from a reduction in nonaccrual loans from $3.3 million at June 30, 2012 to $1.2 million at June 30, 2013.

During the six months ended June 30, 2013, noninterest income totaled $770 thousand, $102 thousand or 15% higher than the same period in the prior year.  ATM and interchange income increased $43 thousand or 39% from the growth in the number of deposit accounts.  Other income was up $55 thousand over the prior year due to title insurance fees and rents collected from the leasing of foreclosed properties.  

Noninterest expense increased $719 thousand or 15% to $5.6 million for the six months ended on June 30, 2013, when compared to the same period in 2012.  Due to the Company’s improved financial performance in 2013 compared to 2012, employee incentive plan awards were resumed resulting in higher incentive plan expense compared to 2012. Cost of living and merit increases along with staff additions as the Company expanded mortgage and brokerage operations, and fewer deferrals of loan origination costs further contributed to higher salaries and employee benefits in the current year. The first six months of 2013 included $351 for net losses on sales and writedowns of other real estate owned compared to $35 thousand in the prior year. Of the $351 thousand in 2013, $321 thousand was related to the writedowns of two properties as the result of new appraisals. Of the $103 thousand increase in professional fees over the same period as last year, over $50 thousand was associated with legal fees incurred that resulted in the recovery of $163 thousand of a loan charged off in a prior year, and the full recovery of $88 thousand for a loan charged off this year.

Three Months Ended June 30, 2013

Net income for the second quarter of 2013 totaled $642 thousand or $0.15 per diluted common share compared to $95 thousand or a loss of ($0.02) per diluted common share for the same quarter last year.   Favorable variances in net interest income, provision for loan losses, and noninterest income were partially offset by higher noninterest expense and income tax expense.

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Net interest income was $3.4 million for the second quarter of 2013, $153 thousand over the $3.3 million earned in the previous quarter, and $214 thousand or 6.6% higher than the same quarter a year ago. The tax equivalent net interest margin was 3.93%, 3.82%, and 3.86% for the three months ended, June 30, 2013, December 31, 2012, and June 30, 2012, respectively. During 2012, 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. Rates paid on interest bearing deposits are now at or below in some cases market rates and further reduction in the cost of deposit funding is not anticipated.

Interest rates are expected to remain at the current low levels for some time, and will continue to compress the interest rate spread between earning assets and interest bearing liabilities. Maturing time deposits will continue to reprice at lower rates in 2013 but to a lesser extent than 2012.

The improvement in the margin that did occur from the 4^th quarter of 2012 to the 2^nd quarter of 2013 was fueled by loan growth and increased non-interest bearing deposits that helped lower the cost of funding. In addition, shifting the earning asset mix from investment securities to loans was a contributing factor in improving the net interest margin as cash flow from the investment portfolio was able to be invested in higher yielding loans. The company will continue to focus on growing earning assets and maintaining margins. The recent increase in interest rates at the end of the quarter should provide for improved yields in investment securities however, loan interest rates have not reacted as yet to this increase and we do not expect that they will for the foreseeable future.

No provision for loan losses was recorded for the three months ended June 30, 2013 compared to $1.1 million for the same period in 2012. The higher provision last year resulted from the replenishment of the allowance after net charge-offs of $1.2 million were recorded in the second quarter of 2012, compared to net charge-offs of $139 thousand in the second quarter of the current year.  

During the three months ended June 30, 2013, noninterest income totaled $453 thousand, $47 thousand or 12% higher than the same period in the prior year.  Service charges on deposit accounts for the second quarter of 2013 were up $18 thousand over the same quarter a year ago, due primarily to higher net NSF fees. ATM and interchange income increased $16 thousand over the second quarter of 2012. The increase in fees resulted from the growth in the number of deposit accounts.  Other income was up $29 thousand over the prior year due to fees generated by the expansion of the loan portfolio and rents collected from the leasing of foreclosed properties.  

Noninterest expense increased $526 thousand or 22% to $2.9 million for the three months ended on June 30, 2013, when compared to the same period in 2012.   Cost of living and merit increases along with staff additions as the Company expanded mortgage operations and securities brokerage, and fewer deferrals of loan origination costs resulted in higher salaries and employee benefits in the current period. Of the $56 thousand increase in professional over the same period as last year, $36 thousand was associated with legal fees incurred that resulted in the recovery of $163 thousand of a loan charged off in a prior year. In the second quarter of 2013 $349 thousand was written off from other real estate owned compared to $32 thousand in 2012 as a result of new appraisals obtained on two properties. Expenses associated with other real estate were $23 thousand less in the second quarter of 2013 compared to 2012.

Financial Condition

At June 30, 2013, the Company had total assets of $392 million compared to $370 million at December 31, 2012.   At June 30, 2013, assets were comprised principally of loans, cash and due from banks, and investment securities. The Company’s management, under the direction of the Asset/Liability Committee (ALCO) of the Board of Directors, reviews the mix of monetary assets and liabilities to ensure the Company maintains an adequate level of liquidity while maximizing interest rate spreads.

Cash and due from banks increased $18 million from December 31, 2012 to June 30, 2013 primarily due to $14 million in capital from the issuance of the Company’s Series C Preferred Stock that closed on June 28, 2013. The more attractive yields available on loans over investments which began in 2012 continue into 2013. Total loans increased $7.7 million or about 3% since year end 2012, funded primarily by a $4 million reduction in available for sale securities over the same period. The rate of loan growth for the first six months of 2013 is expected to continue or increase slightly over the remaining months of 2013.

The Company’s liabilities at June 30, 2013 totaled $342 million compared to $334 million at December 31, 2012, an increase of $8.6 million or 2.6%.   Deposits rose $11.7 million or 3.8% since year end 2012. Interest-bearing deposits accounted for $8.6 million of the increase. The largest increases were in consumer interest-bearing deposits, fueled by maturing CD’s and a marketing campaign to attract new customers. Noninterest-bearing deposits were up $3.1 million from year end 2012 to June 30, 2013 due primarily to growth in commercial accounts.   

At June 30, 2013 and December 31, 2012, the Company had stockholders’ equity of $49.5 million and $36.7 million, respectively, an increase of $12.8 million. The change in stockholders’ equity in 2013 was due to the Company’s issuance of $14 million of Series C Preferred Stock and the result of net income of $1.2 million.  The increase was partially offset by the payment of $267 thousand of dividends on preferred stock, and a $1.4 million decrease in other comprehensive income resulting from a decrease in unrealized gains on securities available for sale.

Management believes the Company has sufficient capital to fund its operations. At June 30, 2013, 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.

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 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.  Nonperforming assets decreased $2.1 million from year end 2012 to June 30, 2013. There were no loans past due ninety days or more and still accruing interest at June 30, 2013 or December 31, 2012.   Nonaccrual loans decreased $1.5 million since year end 2012 to $1.2 million at June 30, 2013, largely as the result of the collateral of one large loan being foreclosed and $1.0 million moved to other real estate owned. Seven foreclosed properties have been sold through June 30, 2013 reducing other real estate, net by $1.7 million. The activity in other real estate owned for the first six months of 2013 are included in Note 5.

At June 30, 2013 and December 31, 2012 the Company had 3 loans classified as restructured loans totaling $6.4 million and $6.5 million, respectively. A partial charge-off of one of the loans accounted for most of the decrease since year end 2012. No loans were restructured during the first half of 2013.

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 $126 thousand at June 30, 2013 compared to $208 thousand at December 31, 2012.  Impaired loans declined $3.0 million from $15.6 million at December 31, 2012 to $12.6 million at June 30, 2013.    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 $125 thousand in the first six months of 2013.   Based on this evaluation, the percentage of the allowance for loan losses to total loans was 1.29%, and 1.38% at June 30, 2013, and December 31, 2012, respectively.  

The most recent economic activity report, dated July 17, 2013 from the Federal Reserve (the Beige Book), indicated that economic activity had expanded at a modest to moderate pace since the previous Beige Book report. Based on July 2013 economic updates of the Federal Reserve Bank’s Fifth District, residential real estate reports were indicative of continued stabilization in the housing market and the value of the collateral. New residential permitting activity in the Fifth District expanded 8.9% in May and 3% over the year. Housing starts also increased, rising 23.3% in the month and 11.8% since May 2012. Home prices in the District were up 2% in April and 6.2% over the year. Home values appreciated in every Fifth District jurisdiction in the month and since April 2012.  

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 June 30, 2013, 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 $106.2 million, compared to $54.2 million at year end 2012.

Lines of credit available to meet liquidity needs include: $19.0 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.  The Company also has an $8 million guidance line of credit to borrow against securities.  The limit on this line is 15% of assets. At June 30, 2013, there were no advances on these lines.

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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
June 30, 2013
Total Capital (to Risk-Weighted Assets)
Consolidated	$	53,176		18.1	%	$	23,546		8.0	%	N/A		N/A
HomeTown Bank	$	40,687		13.8	%	$	23,546		8.0	%	$	29,432		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	$	49,516		16.8	%	$	11,773		4.0	%	N/A		N/A
HomeTown Bank	$	37,027		12.6	%	$	11,773		4.0	%	$	17,659		6.0	%
Tier I Capital (to Average Assets)
Consolidated	$	49,516		12.9	%	$	15,301		4.0	%	N/A		N/A
HomeTown Bank	$	37,027		9.7	%	$	15,301		4.0	%	$	19,126		5.0	%

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 June 30, 2013 outstanding commitments to extend credit including letters of credit were $57.2 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 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 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 adoption of the new guidance did not have a material impact on the Company's 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 adoption of the new guidance did not have a material impact on the Company's 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 added Note 8 Reclassifications Out of Other Comprehensive Income.

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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 six months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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

On June 28, 2013 HomeTown Bankshares Corporation completed a $14,000,000 private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated April 17, 2013, the Company sold 14,000 shares of its 6.0% Series C NonCumulative Perpetual Convertible Preferred Stock at a price of $1,000 per share. The convertible preferred stock pays quarterly dividends equivalent to six percent (6%) per annum, and is convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment.

Item 3.         Defaults Upon Senior Securities

None

Item 4.         Mine Safety Disclosure

Not applicable.

Item 5.         Other Information

None

Item 6.         Exhibits

(a) Exhibits

Exhibit No.
31.1	Certification of Chief Executive of Officer (302 Certification).
31.2	Certification of Chief Financial Officer (302 Certification).
32	Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).
101*	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2013, and December 31, 2012; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2013, and 2012; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013, and 2012;  (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and (v) Notes to Consolidated Financial Statements.

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

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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: August 13, 2013	By:	/S/ SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer
Date: August 13, 2013	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
31.1	Certification of Chief Executive of Officer (302 Certification).
31.2	Certification of Chief Financial Officer (302 Certification).
32	Certification pursuant to 18 U.S.C. Section 1350 (906 Certification).

101*   Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2013, and December 31, 2012; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2013, and 2012; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013, and 2012;  (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and (v) Notes to Consolidated Financial Statements.

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