HomeTown Bankshares (HMTA) 10-Q 2015 Q3 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 endedSeptember 30, 2015.

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 November 12, 2015, 3,296,237 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

 HOMETOWN BANKSHARES CORPORATION

Form 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014		3
Consolidated Statements of Income for the Three and Nine months Ended September 30, 2015 and 2014		4
Consolidated Statements of Comprehensive Income for the Three and Nine months Ended September 30, 2015 and 2014		5
Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2015 and 2014		6
Notes to Consolidated Financial Statements		7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
Item 4.	CONTROLS AND PROCEDURES	34
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosure	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36

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

September 30, 2015 and December 31, 2014

Dollars In Thousands, Except Share and Per Share Data	September 30, 2015			December 31, 2014
	(Unaudited)				*
Assets
Cash and due from banks	$	30,377		$	13,795
Federal funds sold		1,675			649
Securities available for sale, at fair value		50,686			54,603
Restricted equity securities, at cost		2,694			2,476
Loans held for sale		394			242
Loans, net of allowance for loan losses of $3,313 in 2015 and $3,332 in 2014		356,847			328,347
Property and equipment, net		14,658			14,900
Other real estate owned, net of valuation allowance of $562 in 2015 and $422 in 2014		6,708			6,986
Bank owned life insurance		6,242			3,622
Accrued income		1,873			1,924
Other assets		819			665
Total assets	$	472,973		$	428,209
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	81,450		$	51,226
Interest-bearing		318,777			311,369
Total deposits		400,227			362,595
Federal Home Loan Bank borrowings		24,900			20,000
Other borrowings		861			422
Accrued interest payable		439			272
Other liabilities		1,009			1,695
Total liabilities		427,436			384,984
Commitments and contingencies		–			–
Stockholders’ equity:
Convertible preferred stock, no par value; Series C 20,000 shares authorized, 14,000 issued and outstanding at September 30, 2015 and at December 31, 2014		13,293			13,293
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 3,296,237 (includes 35,549 restricted shares) at September 30, 2015 and 3,287,567 (includes 37,727 restricted shares) at December 31, 2014		16,481			16,438
Surplus		15,369			15,310
Retained deficit		(407	)		(2,271	)
Accumulated other comprehensive income		434			455
Total HomeTown Bankshares Corporation stockholders’ equity		45,170			43,225
Non-controlling interest in consolidated subsidiary		367			–
Total stockholders’ equity		45,537			43,225
Total liabilities and stockholders’ equity	$	472,973		$	428,209

*Derived from consolidated audited financial statements.

See Notes to Consolidated Financial Statements

3

HomeTown Bankshares Corporation

Consolidated Statements of Income

For thethree and nine months ended September 30, 2015 and 2014

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Dollars In Thousands, Except Share and Per Share Data	2015		2014		2015		2014
Interest and dividend income:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Loans and fees on loans	$	4,173	$	3,845	$	12,119	$	11,314
Taxable investment securities		170		240		552		770
Nontaxable investment securities		100		106		303		293
Dividends on restricted stock		36		32		104		94
Other interest income		10		9		28		30
Total interest and dividend income		4,489		4,232		13,106		12,501
Interest expense:
Deposits		490		426		1,403		1,308
Other borrowed funds		100		94		294		286
Total interest expense		590		520		1,697		1,594
Net interest income		3,899		3,712		11,409		10,907
Provision for loan losses		–		–		–		202
Net interest income after provision for loan losses		3,899		3,712		11,409		10,705
Noninterest income:
Service charges on deposit accounts		128		118		362		326
ATM and interchange income		148		113		416		316
Mortgage banking		161		102		539		149
Gains on sales of investment securities		12		–		52		108
Other income		232		168		542		441
Total noninterest income		681		501		1,911		1,340
Noninterest expense:
Salaries and employee benefits		1,641		1,510		4,801		4,303
Occupancy and equipment expense		441		398		1,325		1,128
Data processing expense		215		177		632		529
Advertising and marketing expense		198		196		607		431
Professional fees		80		245		303		432
Bank franchise taxes		66		65		197		196
FDIC insurance expense		80		85		239		197
Losses (gains) on sales and writedowns of other real estate owned, net		140		–		140		(5	)
Other real estate owned expense		35		50		105		173
Directors’ fees		56		56		166		165
Other expense		385		310		1,153		997
Total noninterest expense		3,337		3,092		9,668		8,546
Net income before income taxes		1,243		1,121		3,652		3,499
Income tax expense		381		344		1,108		1,086
Net income		862		777		2,544		2,413
Less net income attributable to non-controlling interest		7		–		50		–
Net income attributable to HomeTown Bankshares Corporation		855		777		2,494		2,413
Effective dividends on preferred stock		210		210		630		630
Net income available to common stockholders	$	645	$	567	$	1,864	$	1,783
Basic earnings per common share	$	0.20	$	0.17	$	0.57	$	0.54
Diluted earnings per common share	$	0.15	$	0.14	$	0.45	$	0.44
Weighted average common shares outstanding		3,296,237		3,287,567		3,294,681		3,283,962
Diluted weighted average common shares outstanding		5,536,237		5,527,567		5,534,681		5,523,962

See Notes to Consolidated Financial Statements

4

HomeTown BanksharesCorporation

Consolidated Statements of Comprehensive Income

For the three and nine months endedSeptember 30, 2015 and 2014

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Dollars In Thousands	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net income	$	862		$	777		$	2,544		$	2,413
Other comprehensive income:
Net unrealized holding gains on securities available for sale during the period		275			168			20			1,450
Deferred income tax expense on unrealized holding gains on securities available for sale		(93	)		(57	)		(7	)		(493	)
Reclassification adjustment for gains on sales of investment securities included in net income		(12	)		–			(52	)		(108	)
Tax expense related to realized gains on securities sold		4			–			18			37
Total other comprehensive income (loss)		174			111			(21	)		886
Comprehensive income		1,036			888			2,523			3,299
Less: Comprehensive income attributable to the non-controlling interest		7			–			50			–
Comprehensive income attributable to HomeTown Bankshares Corporation	$	1,029		$	888		$	2,473		$	3,299

See Notes to Consolidated Financial Statements

5

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For thenine months endedSeptember 30, 2015 and 2014

	For the Nine Months Ended September 30,
Dollars in Thousands	2015			2014
Cash flows from operating activities:	(Unaudited)			(Unaudited)
Net income	$	2,544		$	2,413
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		571			482
Provision for loan losses		–			202
Amortization of premium on securities, net		440			438
Gains on sales of loans held for sale		(407	)		(106	)
Losses (gains) on sales and writedowns of other real estate, net		140			(5	)
Gains on sales of investment securities		(52	)		(108	)
Increase in value of life insurance contracts		(120	)		(77	)
Stock compensation expense		102			41
Originations of loans held for sale		(18,136	)		(6,400	)
Proceeds from sales of loans held for sale		18,391			6,189
Changes in assets and liabilities:
Accrued income		51			100
Other assets		(154	)		(47	)
Deferred taxes, net		11			603
Accrued interest payable		167			9
Other liabilities		(686	)		589
Net cash flows provided by operating activities		2,862			4,323
Cash flows used in investing activities:
Net (increase) decrease in federal funds sold		(1,026	)		627
Purchases of investment securities available for sale		(5,997	)		(6,438	)
Sales, maturities, and calls of available for sale securities		9,494			8,710
Purchase of restricted equity securities, net		(218	)		(13	)
Net increase in loans		(28,500	)		(23,352	)
Proceeds from sales of other real estate		138			982
Purchases of bank owned life insurance		(2,500	)		–
Purchases of property and equipment		(329	)		(1,863	)
Net cash flows used in investing activities		(28,938	)		(21,347	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		30,224			947
Net increase in interest-bearing deposits		7,408			10,760
Net increase in FHLB borrowings		4,900			250
Net increase in other borrowings		439			211
Net increase in equity of non-controlling interest		317			–
Preferred stock dividend payment		(630	)		(630	)
Net cash flows provided by financing activities		42,658			11,538
Net increase (decrease) in cash and cash equivalents		16,582			(5,486	)
Cash and cash equivalents, beginning		13,795			19,537
Cash and cash equivalents, ending	$	30,377		$	14,051
Supplemental disclosure of cash flow information:
Cash payments for interest	$	1,530		$	1,585
Cash payments for income taxes	$	1,676		$	42
Supplemental disclosure of noncash investing activities:
Change in unrealized gains on available for sale securities	$	(32	)	$	1,342
Transfer from loans to other real estate	$	–		$	1,520

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

Basis of Presentation

The consolidated financial statements as of September 30, 2015 and for the periods ended September 30, 2015 and 2014 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 September 30, 2015 are 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, 2014, included in the Company’s Form 10-K for the year ended December 31, 2014. Interim financial performance is not necessarily indicative of performance for the 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 of HomeTown Bankshares Corporation include the accounts of its wholly-owned subsidiary HomeTown Bank and the accounts of its subsidiary, HomeTown Residential Mortgage LLC. HomeTown Bank owns a 49% interest in HomeTown Residential Mortgage LLC which originates and sells mortgages secured by personal residences. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances andtransactions have been eliminated in consolidation.

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 Form 10-K for these policies.

Note 2. Investment Securities

The amortized cost and fair value of available-for-sale securities as of September 30, 2015 and December 31, 2014, are as follows:

(Dollars In Thousands)	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	24,385	$	301	$	(103	)	$	24,583
Mortgage-backed securities		8,841		86		(57	)		8,870
Municipal securities		16,802		465		(34	)		17,233
	$	50,028	$	852	$	(194	)	$	50,686

(Dollars In Thousands)	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U. S. Government agency securities	$	26,812	$	333	$	(180	)	$	26,965
Mortgage-backed securities		9,678		125		(64	)		9,739
Municipal securities		17,423		531		(55	)		17,899
	$	53,913	$	989	$	(299	)	$	54,603

7

U. S. Government and federal agency securities:The unrealized losses on 15 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 September 30, 2015.

Mortgage-backed securities:The unrealized losses on 11 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 September 30, 2015.

Municipal securities:The unrealized losses on 10 of the Company’s investments in municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates and credit spreads and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015.

The following tables demonstrate the unrealized loss position of available-for-sale securities at September 30, 2015 and December 31, 2014. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

	September 30, 2015
	Less than 12 months					12 months or more					Total
(Dollars In Thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U. S. Government agency securities	$	2,844	$	(32	)	$	5,331	$	(71	)	$	8,175	$	(103	)
Mortgage-backed securities		2,842		(21	)		2,235		(36	)		5,077		(57	)
Municipal securities		3,066		(28	)		270		(6	)		3,336		(34	)
	$	8,752	$	(81	)	$	7,836	$	(113	)	$	16,588	$	(194	)

	December 31, 2014
	Less than 12 months					12 months or more					Total
(Dollars In Thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agency securities	$	5,568	$	(48	)	$	7,078	$	(132	)	$	12,646	$	(180	)
Mortgage-backed securities		742		(6	)		4,058		(58	)		4,800		(64	)
Municipal securities		1,625		(20	)		2,186		(35	)		3,811		(55	)
	$	7,935	$	(74	)	$	13,322	$	(225	)	$	21,257	$	(299	)

There are 36 debt securities with fair values totaling $16.6 million considered temporarily impaired at September 30, 2015.  As of September 30, 2015, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

The Company realized gains of $67 thousand and realized losses on $15 thousand on sales of securities in the first nine months of 2015. The Company realized gains of $132 thousand and $24 thousand of losses during the same period last year.

The amortized cost and fair values of investment securities available for sale at September 30, 2015, by contractual maturity are as follows:

(Dollars In Thousands)	Amortized Cost		Fair Value
One year or less	$	−	$	−
Over one through five years		1,931		1,961
Over five through ten years		9,268		9,332
Greater than 10 years		38,829		39,393
	$	50,028	$	50,686

8

 Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at September 30, 2015 and December 31, 2014 were as follows:

(Dollars In Thousands)	September 30, 2015			December 31, 2014
Construction loans:
Residential	$	12,398		$	10,019
Land acquisition, development & commercial		27,566			23,686
Real estate:
Residential		97,803			86,269
Commercial		139,751			135,070
Commercial, industrial & agricultural		49,649			44,807
Equity lines		25,308			24,330
Consumer		7,685			7,498
Total		360,160			331,679
Less allowance for loan losses		(3,313	)		(3,332	)
Loans, net	$	356,847		$	328,347

The past due and nonaccrual status of loans as of September 30, 2015 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	$	194	$	−	$	−	$	194	$	12,204	$	12,398	$	−
Land acquisition, development & commercial		−		−		11		11		27,555		27,566		11
Real estate:
Residential		−		50		99		149		97,654		97,803		−
Commercial		795		29		−		824		138,927		139,751		378
Commercial, industrial & agricultural		82		−		35		117		49,532		49,649		47
Equity lines		51		−		−		51		25,257		25,308		−
Consumer		3		−		−		3		7,682		7,685		−
Total	$	1,125	$	79	$	145	$	1,349	$	358,811	$	360,160	$	436

The past due and nonaccrual status of loans as of December 31, 2014 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	$	−	$	−	$	−	$	−	$	10,019	$	10,019	$	−
Land acquisition, development & commercial		−		−		−		−		23,686		23,686		−
Real estate:
Residential		−		381		261		642		85,627		86,269		475
Commercial		−		85		−		85		134,985		135,070		758
Commercial, industrial & agricultural		96		−		−		96		44,711		44,807		−
Equity lines		105		−		−		105		24,225		24,330		−
Consumer		10		36		−		46		7,452		7,498		21
Total	$	211	$	502	$	261	$	974	$	330,705	$	331,679	$	1,254

There were one loan of $99 thousand that were past due ninety days or more and still accruing interest as of September 30, 2015. There were no loans that were past due ninety days or more and still accruing interest at December 31, 2014.

9

Impaired loans, which include TDR’s of $6.8 million, and the related allowance at September 30, 2015, were as follows:

September 30, 2015 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		−		−		−		−		−
Real estate:
Residential		249		249		−		257		6
Commercial		7,584		7,584		−		7,658		210
Commercial, industrial & agricultural		12		12		−		12		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with no allowance	$	7,845	$	7,845	$	−	$	7,927	$	216

September 30, 2015 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		−		−		−		−		−
Commercial		132		132		132		137		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	132	$	132	$	132	$	137	$	−

Impaired loans, which include TDR’s of $6.7 million, and the related allowance at December 31, 2014, were as follows:

December 31, 2014 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		−		−		−		−		−
Real estate:
Residential		525		700		−		605		12
Commercial		7,507		7,507		−		8,563		289
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with no allowance	$	8,032	$	8,207	$	−	$	9,168	$	301

December 31, 2014 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		−		−		−		−		−
Commercial		141		141		141		153		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	141	$	141	$	141	$	153	$	−

10

Troubled Debt Restructurings

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.8 million at September 30, 2015.  This compares with $6.7 million in total restructured loans at December 31, 2014.

No loans were modified in a TDR during the third quarter of 2015.

The following table presents by class of loan, information related to the loan modified in a TDR during the nine months ended September 30, 2015:

	Loans modified as TDR's For the nine months ended September 30, 2015
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(Dollars in Thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real estate loans:
Residential		—		—		—
Commercial		1		260		255
Commercial, industrial, agricultural		—		—		12
Equity lines		—		—		—
Consumer		—		—		—
Total Loans		1	$	260	$	267

The following table presents by class of loan, information related to the loan modified in a TDR during the third quarter ended September 30, 2014:

	Loans modified as TDR's For the nine months ended September 30, 2014
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(Dollars in Thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real estate loans:
Residential		—		—		—
Commercial		1		1,932		632
Commercial, industrial, agricultural		—		—		—
Equity lines		—		—		—
Consumer		—		—		—
Total Loans		1	$	1,932	$	632

11

The following table presents by class of loan, information related to the loan modified in a TDR during the nine months ended September 30, 2014:

	Loans modified as TDR's For the nine months ended September 30, 2014
Class of Loan	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(Dollars in Thousands)
Construction loans:
Residential		—	$	—	$	—
Land acquisition, development & commercial		—		—		—
Real estate loans:
Residential		—		—		—
Commercial		1		1,932		632
Commercial, industrial, agricultural		—		—		—
Equity lines		—		—		—
Consumer		—		—		—
Total Loans		1	$	1,932	$	632

Four of the six loans totaling $6.5 million were not on nonaccrual status at September 30, 2015. The other two loans totaling $258 thousand were on nonaccrual status at the end of the third quarter of 2015.  The loan restructured into two TDR’s in the nine months ended September 30, 2015 was included in substandard nonaccrual loans and impaired loans at the end of 2014. All six TDR’s were current with their restructured terms at September 30, 2015. None of the loans restructured as TDR’s in 2014 or 2015 have been past due over 90 days.

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, if a specific reserve is associated with the loan it 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.

12

Note 4. Allowance for Loan Losses

The following table presents, as of September 30, 2015, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

September 30, 2015	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	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	$	43	$	−		$	−	$	56		$	99	$	−	$	99	$	12,398	$	−	$	12,398
Land acquisition, development & commercial		453		−			−		(262	)		191		−		191		27,566		−		27,566
Real estate:
Residential		833		−			1		183			1,017		−		1,017		97,803		249		97,554
Commercial		1,012		−			−		73			1,085		132		953		139,751		7,716		132,035
Commercial, industrial & agricultural		319		−			10		115			444		−		444		49,649		12		49,637
Equity lines		423		−			−		(122	)		301		−		301		25,308		−		25,308
Consumer		65		(60	)		30		44			79		−		79		7,685		−		7,685
Unallocated		184		−			−		(87	)		97		−		97		−		−		−
Total	$	3,332	$	(60	)	$	41	$	−		$	3,313	$	132	$	3,181	$	360,160	$	7,977	$	352,183

The following table presents, as of December 31, 2014, 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, 2014	Allowance for loan losses																Loans
Class of Loan (Dollars in Thousands)	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	$	156	$	−		$	−	$	(113	)	$	43	$	−	$	43	$	10,019	$	−	$	10,019
Land acquisition, development & commercial		872		−			−		(419	)		453		−		453		23,686		−		23,686
Real estate:
Residential		867		(233	)		34		165			833		−		833		86,269		525		85,744
Commercial		1,008		−			−		4			1,012		141		871		135,070		7,648		127,422
Commercial, industrial & agricultural		327		(55	)		−		47			319		−		319		44,807		−		44,807
Equity lines		385		(136	)		37		137			423		−		423		24,330		−		24,330
Consumer		63		(40	)		4		38			65		−		65		7,498		−		7,498
Unallocated		43		−			−		141			184		−		184		−		−		−
Total	$	3,721	$	(464	)	$	75	$	−		$	3,332	$	141	$	3,191	$	331,679	$	8,173	$	323,506

13

Loans by credit quality indicators as of September 30, 2015 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	12,398	$	−	$	−	$	−	$	12,398
Land acquisition, development & commercial		27,555		−		−		11		27,566
Real estate loans:
Residential		93,311		4,243		249		−		97,803
Commercial		136,792		1,172		1,409		378		139,751
Commercial, industrial, agricultural		49,078		524		−		47		49,649
Equity lines		25,308		−		−		−		25,308
Consumer		7,675		−		10		−		7,685
Total Loans	$	352,117	$	5,939	$	1,668	$	436	$	360,160

Loans by credit quality indicators as of December 31, 2014 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,019	$	−	$	−	$	−	$	10,019
Land acquisition, development & commercial		23,672		−		14		−		23,686
Real estate loans:
Residential		81,409		4,335		50		475		86,269
Commercial		131,087		2,302		923		758		135,070
Commercial, industrial, agricultural		44,248		521		38		−		44,807
Equity lines		24,330		−		−		−		24,330
Consumer		7,475		−		2		21		7,498
Total Loans	$	322,240	$	7,158	$	1,027	$	1,254	$	331,679

At September 30, 2015 and December 31, 2014, the Company had no loans classified as Doubtful or Loss.

Note 5. Foreclosed Properties

Changes in foreclosed properties for the nine months ended September 30, 2015 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	7,408		$	(422	)	$	6,986
Additions		—			—			—
Writedowns		—			(140	)		(140	)
Sales		(138	)		—			(138	)
Balance at the end of the period	$	7,270		$	(562	)	$	6,708

Changes in foreclosed properties for the nine months ended September 30, 2014 were as follows:

(Dollars In Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	9,078		$	(935	)	$	8,143
Additions		1,520			—			1,520
Writedowns		—			—			—
Sales		(1,399	)		422			(977	)
Balance at the end of the period	$	9,199		$	(513	)	$	8,686

14

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2015 and December 31, 2014 were as follows:

(Dollars In Thousands)	September 30, 2015		December 31, 2014
Residential lots	$	2,886	$	3,023
Residential development		423		423
Commercial lots		990		1,076
Commercial buildings		2,409		2,464
Total Other Real Estate Owned	$	6,708	$	6,986

There were no residential real estate loans in the process of foreclosure at September 30, 2015 or December 31, 2014.

Other real estate owned related expenses in the consolidated statements of income for the three and nine months ended September 30, 2015 and September 30, 2014 include:

(Dollars In Thousands)	Three months Ended September 30, 2015		Three months Ended September 30, 2014		Nine months Ended September 30, 2015		Nine months Ended September 30, 2014
Net gain on sales	$	—	$	—	$	—	$	(5	)
Provision for unrealized losses		140		—		140		—
Operating expenses		35		50		105		173
Total Other Real Estate Owned	$	175	$	50	$	245	$	168

Note 6. Stock Based Compensation

The Company recorded stock based compensation expense of $102 thousand and $41 thousand for the years to date September 30, 2015 and 2014, respectively.

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors may grant stock options to directors, officers and employees. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options.  On December 18, 2014, the Board of Directors granted 165 thousand shares which will vest over a five year period. Financial assumptions and variables used to determine the fair value of these stock options are; risk free interest rate of 2.01%, an expected term of 7.5 years, an expected stock price volatility of 26% and a dividend rate of 0%. The fair value of the options was determined to be $2.29 per option. Compensation expense will be charged to income ratably over the vesting period and was $56 thousand year to date September 30, 2015. As of September 30, 2015 there was $320 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 4.25 years. No options were granted during the nine months ended September 30, 2015. All previously issued options were fully vested at the end of 2012.

A summary of option activity under the 2005 stock option plan year to date September 30, 2015 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2014		549,560		$	8.61
Granted		–			–
Exercised		–			–
Forfeited		(3,100	)		7.76
Balance at September 30, 2015		546,460		$	8.62	$	–		3.31
Exercisable at September 30, 2015		383,460		$	9.35	$	–		0.79

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2015.

15

In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five year period and compensation expense is charged to income ratably over the vesting period and was $46 thousand and $41 thousand for the years to date September 30, 2015 and 2014, respectively. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The Company granted 8,670 and 17,268 shares of restricted stock under the plan during the years to date September 30, 2015 and 2014, respectively. The weighted-average grant date fair value of restricted stock granted in 2015 was $7.70 compared to $6.25 in 2014.  

As of September 30, 2015, there was $180 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2020. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	For the nine months ended September 30, 2015					For the nine months ended September 30, 2014
	Shares			Weighted-Average Grant Date Fair Value		Shares			Weighted-Average Grant Date Fair Value
Nonvested at beginning of year		37,727		$	5.56		27,846		$	5.05
Granted		8,670			7.70		17,268			6.25
Vested		(10,848	)		5.56		(7,387	)		5.23
Cancelled		–			–		–			–
Nonvested at the end of the period		35,549		$	6.08		37,727		$	5.56

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 financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale:Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

16

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:

(Dollars In Thousands)			Carrying value at September 30, 2015
Description	Balance as of September 30, 2015		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	$	24,583	$	–	$	24,583	$	–
Mortgaged-backed securities		8,870		–		8,870		–
Municipal securities		17,233		–		17,233		–

(Dollars In Thousands)			Carrying value at December 31, 2014
Description	Balance as of December 31, 2014		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	$	26,965	$	–	$	26,965	$	–
Mortgaged-backed securities		9,739		–		9,739		–
Municipal securities		17,899		–		17,899		–

Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

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

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s consolidated joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.

Other Real Estate Owned (OREO): The carrying amount of real estate owned by the Company resulting from foreclosures is estimated at the lesser of cost or the fair value of the real estate based on an observable market price or a current appraised value less selling costs. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the real estate is further impaired below the appraised value or there is no observable market price, the Company records the real estate as nonrecurring Level 3.

17

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014.

(Dollars In Thousands)			Carrying value at September 30, 2015
Description	Balance as of September 30, 2015		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	$	–	$	–	$	–	$	–
Loans held for sale		394		–		394		–
Other real estate owned		6,708		–		328		6,380

(Dollars In Thousands)			Carrying value at December 31, 2014
Description	Balance as of December 31, 2014		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	$	–	$	–	$	–	$	–
Loans held for sale		242		–		242		–
Other real estate owned		6,986		–		3,255		3,731

At September 30, 2015 and December 31, 2014, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2015:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for September 30, 2015
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	–	Discounted appraised value	Selling cost	6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal	94%	-	94%	(94%)
Other real estate owned	$	4,245	Discounted appraised value	Selling cost	6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal	0%	-	20%	(10%)
	$	2,135	Internal evaluations	Internal evaluations	4%	-	39%	(14%)

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2014:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2014
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	–	Discounted appraised value	Selling cost	6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal	94%	-	94%	(94%)
Other real estate owned	$	1,458	Discounted appraised value	Selling cost	6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal	4%	-	4%	(4%)
	$	2,273	Internal evaluations	Internal evaluations	0%	-	33%	(11%)

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts reported in the consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of contractual maturities on such time deposits.

18

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At September 30, 2015 and December 31, 2014, management believes the carrying value of federal funds sold approximates estimated market value.

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Bank owned life insurance: The cash values of these policies are estimates using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit and individual retirement accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of contractual maturities on such time deposits.

FHLB borrowings: The fair values for FHLB borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings to the contractual maturities on such FHLB borrowings.

Other borrowings: The warehouse line of credit is a short term revolving credit facility used to fund mortgage loans originations until the underlying loan is sold. The warehouse line of credit, federal funds purchased, borrowings under repurchase agreements mature within 30 days and approximate their fair values.

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 September 30, 2015 and December 31, 2014, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

19

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at September 30, 2015:

(Dollars In Thousands)			Fair value at September 30, 2015
Description	Carrying value as of September 30, 2015		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	$	30,377	$	28,377	$	2,008	$	–	$	30,385
Federal funds sold		1,675		1,675		–		–		1,675
Securities available-for-sale		50,686		–		50,686		–		50,686
Restricted equity securities		2,694		–		2,694		–		2,694
Loans held for sale		394		–		394		–		394
Loans, net		356,847		–		–		360,535		360,535
Bank owned life insurance		6,242		–		6,242		–		6,242
Accrued income		1,873		–		1,873		–		1,873
Financial liabilities
Total deposits		400,227		–		400,788		–		400,788
FHLB borrowings		24,900		–		25,171		–		25,171
Other borrowings		861		–		861		–		861
Accrued interest payable		439		–		439		–		439

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2014:

(Dollars In Thousands)			Fair value at December 31, 2014
Description	Carrying value as of December 31, 2014		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	$	13,795	$	11,794	$	2,012	$	-	$	13,806
Federal funds sold		649		649		-		-		649
Securities available-for-sale		54,603		-		54,603		-		54,603
Restricted equity securities		2,476		-		2,476		-		2,476
Loans held for sale		242		-		242		-		242
Loans, net		328,347		-		-		332,167		332,167
Bank owned life insurance		3,622		-		3,622		-		3,622
Accrued income		1,924		-		1,924		-		1,924
Financial liabilities
Total deposits		362,595		-		350,418		-		350,418
FHLB borrowings		20,000		-		20,356		-		20,356
Other borrowings		422		-		422		-		422
Accrued interest payable		272		-		272		-		272

20

Note 8. Reclassifications Out of Other Comprehensive Income

Items reclassified in their entirety to net income for the three and nine months ended September 30, 2015 and 2014 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Three Months Ended September 30,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2015		2014
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale	$	12		–	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		4		–	Income tax expense
	$	8		–	Net income

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Nine months Ended September 30,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2015		2014
Available for sale securities
Realized gains on sales of securities held for sale during the period consider available for sale	$	52	$	108	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		18		37	Income tax expense
	$	34	$	71	Net income

Note 9. Earnings per Common Share

The following tables show the weighted average number of shares used in computing earnings per common share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

	For the Three Months Ended September 30,
	2015							2014
Dollars In Thousands, except share and per share data	Weighted Average Common SharesOutstanding		Net Income Available to Common Shareholders		Per Share Amount			Weighted Average Common SharesOutstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		3,296,237	$	645	$	0.20			3,287,567	$	567	$	0.17
Series C Preferred Stock Dividends				210							210
Effect of dilutive securities:
Convertible preferred stock		2,240,000		–		(0.05	)		2,240,000		–		(0.03	)
Earnings per common share, diluted		5,536,237	$	855	$	0.15			5,527,567	$	777	$	0.14

21

	For the Nine months Ended September 30,
	2015							2014
Dollars In Thousands, except share and per share data	Weighted Average Common SharesOutstanding		Net Income Available to Common Shareholders		Per Share Amount			Weighted Average Common SharesOutstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		3,294,681	$	1,864	$	0.57			3,283,962	$	1,783	$	0.54
Series C Preferred Stock Dividends				630							630
Effect of dilutive securities:
Convertible preferred stock		2,240,000		–		(0.12	)		2,240,000		–		(0.10	)
Earnings per common share, diluted		5,534,681	$	2,494	$	0.45			5,523,962	$	2,413	$	0.44

At September 30, 2015 and 2014, stock options to purchase 546,460 and 384,560 shares, respectively, were outstanding. These options were not included in the calculation of diluted weighted average shares as their impact would be antidilutive. Nonvested restricted shares were included in weighted average common shares outstanding for computing basic earnings per share, as the holder has voting rights and would share in a stock or cash dividend during the vesting period.

Note 10. Subsequent Events

On October 22, 2015, the Company’s Board of Directors declared a quarterly cash dividend in the amount of $15.00 per Series C convertible preferred share, payable on December 15, 2015 to preferred shareholders of record November 30, 2015.

22

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, 2014. 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 Roanoke Valley, the New River Valley and Smith Mountain Lake. The Company serves these markets through a network of six branches, seven ATM’s, HomeTown Mortgage and HomeTown Investments. A high level of responsive and personal service coupled with local decision-making are the hallmarks of the Company’s customer oriented strategy. The Company offers 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 2950 Market Street; in Roanoke County, Virginia at the intersection of Colonial Avenue and Virginia Route 419; in the City of Roanoke, Virginia at 3521 Franklin Road; and in the City of Salem, Virginia at 852 West Main Street. HomeTown Bank, with a 49% interest in the joint venture HomeTown Residential Mortgage, LLC, operates a dedicated mortgage office on Colonial Ave., next to the existing branch.

HomeTown Investments provides diverse investment products and financial advisory services to existing and prospective customers. These products and services provide another source of revenue for the Company. Investment and insurance products and services are offered through an unaffiliated entity Infinex Investments, Inc., Member FINRA/SIPC. HomeTown Investments is a subsidiary of the Bank. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.

Due to limited available space at the downtown office and continued growth of the Company, Management recognized the need for an Operations Center that would provide ample space for current and future expansion. The Bank owned an office building, through foreclosure, at 4633 Brambleton Avenue in Roanoke that was converted to a secure Operations Center. At the end of 2014, the Board of Directors approved the Bank’s use of the property, and it was reclassed from other real estate owned to property and equipment. Beginning in December, 2014 and through the first half of 2015, 27 employees have relocated to the facility.

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, 2014. 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.

23

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 the Company’s historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and economic trends. These are generally grouped by homogeneous loan pools. Allowances for impaired loans are generally determined based on collateral values less cost to sell, 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.

Discussion of Operations

Executive Summary

HomeTown Bankshares reported earnings for the third quarter of 2015 and year to date September 30, 2015 that exceeded earnings for the same periods in the prior year by 10.0% and 3.4%, respectively. Favorable variances in net interest income and noninterest income were partially negated by higher noninterest expense. Net interest income rose as the result of the expanding loan portfolio. The net interest margin declined as competition for loans kept rates relatively low. Credit quality continued to improve in the third quarter of 2015, and as a result no provision for loan losses has been deemed necessary in 2015.

Three Months Ended September 30, 2015

Net income attributable to HomeTown Bankshares was $855 thousand for the third quarter of 2015, an increase of $78 thousand or 10.0% over the same quarter last year. Favorable variances in net interest income, and noninterest income were partially offset by an unfavorable variance in noninterest expense.

Net interest income for the three months ended September 30, 2015 totaled $3.9 million, $100 thousand higher than the previous quarter, and was $187 thousand or 5.0% greater than the same quarter in the prior year. The expansion of the loan portfolio fueled the increase. Average loans for the quarter were $357 million, up $9.1 million over the second quarter of 2015 and up $37.7 million or 11.8% over the third quarter of 2014. The rate of loan growth has declined each quarter of 2015 and this trend is expected to continue into the fourth quarter. Deposits funded much of the expansion of the loan portfolio. Average total deposits for the third quarter of 2015 totaled $385 million, an increase of $15.8 million over the average for the previous quarter, and $34.9 million or 10.0% over the same quarter in 2014. A strategic reduction of the investment portfolio funded the remainder of the growth in loans in the third quarter of 2015 compared to the third quarter of 2014.

The net interest margin was 3.77%, 3.80%, and 3.88% for the three months ended September 30, 2015, June 30, 2015, and September 30, 2014, respectively. The decline in the margin is due to the drop in the yield on earning assets. The earning asset yield was 4.33% for the third quarter of 2015, three basis points below the previous quarter and eight basis points below the same quarter in 2014. At the same time the cost of funds for the third quarter of 2015 was the same as the previous quarter, and increased three basis points when compared to the third quarter of 2014. Competition has driven rates on new loans and renewals downward in the continuing low interest rate environment. The increase in the cost of funds in the third quarter of 2015 over 2014 resulted from a CD promotion in December 2014 and June 2015 to raise funding to meet loan demand. The higher cost of Federal Home Loan Bank advances also contributed to the increase in the cost of funds.

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	For the Three Months Ended September 30, 2015								For the Three Months Ended September 30, 2014
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	1,206		$	—		0.12	%	$	1,662		$	—		0.12	%
Deposits in banks		4,936			10		0.83			5,161			9		0.69
Securities, taxable		35,142			170		2.02			41,928			240		2.29
Securities, nontaxable (1)		14,516			100		4.11			14,968			106		4.25
Restricted equity securities		2,694			36		5.32			2,728			32		4.74
Loans held for sale		444			5		4.15			328			3		4.00
Loans		356,814			4,168		4.63			319,080			3,842		4.78
Total earnings assets		415,752			4,489		4.33			385,855			4,232		4.41
Less: Allowance for loan losses		(3,315	)							(3,614	)
Total non-earning assets		45,873								38,098
Total Assets	$	458,310							$	420,339
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	78,534		$	28		0.14	%	$	77,503		$	33		0.17	%
Money market savings		66,496			40		0.24			62,238			47		0.30
Regular savings		36,351			36		0.39			29,966			34		0.45
Time Deposits		142,134			386		1.07			132,990			312		0.93
FHLB borrowings		25,092			94		1.46			25,892			89		1.36
Other borrowings		1,273			6		1.67			1,144			5		1.63
Total interest bearing liabilities		349,880			590		0.66			329,733			520		0.63
Non-interest bearing liabilities:
Demand deposits		61,595								47,554
Other liabilities		1,532								986
Total liabilities		413,007								378,273
Total HomeTown Bankshares Corporation stockholders’ equity		44,939								42,066
Non-controlling interest in consolidated subsidiary		364			—					—			—
Total Liabilities and Stockholders’ Equity	$	458,310			590				$	420,339			520
Net interest income				$	3,899							$	3,712
Interest rate spread							3.67								3.78
Interest expense to average earning assets							0.56								0.53
Net interest margin							3.77	%							3.88	%

(1) Income and yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.

25

	Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
	Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	—		$	—		$	—
Deposits in banks		1			2			(1	)
Securities, taxable		(70	)		(33	)		(37	)
Securities, nontaxable		(6	)		(3	)		(3	)
Restricted equity securities		4			4			—
Loans held for sale		2			—			2
Loans		326			(87	)		413
Total interest income		257			(117	)		374
Interest expense:
Interest bearing liabilities:
Checking		(5	)		(6	)		1
Money market savings		(7	)		(10	)		3
Regular savings		2			(5	)		7
Time Deposits		74			31			43
FHLB borrowings		5			7			(2	)
Other borrowings		1			—			1
Total interest expense		70			17			53
Net interest income	$	187		$	(134	)	$	321

No provision for loan losses was recorded in the third quarter of 2015 or 2014. See discussion under Allowance for Loan Losses for additional information.

Noninterest income totaled $681 thousand for the third quarter of 2015, up $180 thousand or 35.9% from the same period last year. Service charges on deposit accounts, and ATM and interchange income were up $45 thousand for the third quarter of 2015 compared to 2014 due to deposit growth and changes late in the quarter in the fee structure to be more in line with industry norms. Mortgage banking income was $59 thousand higher than the prior year, due in part to the resurgence in lending that began in the latter half of 2014 and continued in 2015.   The Roanoke Valley Association of Realtors (RVAR) reported 1,399 homes sold in the third quarter of 2015 compared to 1,168 for the same quarter last year. Other income was $64 thousand higher for the quarter ended September 30, 2015 compared to the same quarter last year due to higher investment brokerage commission fees, merchant processing income and loan fees.

For the three months ended September 30, 2015, noninterest expense was $3.3 million, $245 thousand or 7.9% more than the $3.1 million recorded in the same quarter last year. Salaries and employee benefits for the three months ended September 30, 2015 were $1.6 million compared to $1.5 million last year. The $131 thousand or 8.7% increase was due to several factors including the expansion of operations and normal recurring merit increases, and increased stock and deferred compensation plan costs. Occupancy and equipment expense totaled $441 thousand in the third quarter of 2015, an increase of $43 thousand or 10.8% over last year, as a result of new facilities for operations added in December 2014.

Nine months Ended September 30, 2015

Net income attributable to HomeTown Bankshares for the year through September 30, 2015 was $2.5 million, $81 thousand or 3.4% above the earnings for the same period in 2014. Favorable variances in net interest income, provision for loan losses, and noninterest income were partially offset by an unfavorable variance in noninterest expense.

Net interest income for the first nine months of 2015 totaled $11.4 million and was $502 thousand or 4.6% higher than the same period in the prior year. The growth in earning assets was the driver of the increase in net interest income. Average earning assets for the nine months ended September 30, 2015 were $407 million, an increase of $26.9 million or 7.1% over the average for the same period of time in 2014. Total average deposits increased $27.1 million during this same time frame and funded the expansion in earning assets.

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	For the Nine months Ended September 30, 2015								For the Nine months Ended September 30, 2014
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	1,125		$	1		0.13	%	$	883		$	1		0.16	%
Deposits in banks		5,282			27		0.69			6,211			29		0.62
Securities, taxable		35,959			552		2.10			43,777			770		2.35
Securities, nontaxable (1)		14,628			303		4.13			13,621			293		4.28
Restricted equity securities		2,715			104		5.12			2,559			94		4.90
Loans held for sale		485			15		4.04			199			8		5.13
Loans		346,347			12,104		4.67			312,404			11,306		4.84
Total earnings assets		406,541			13,106		4.36			379,654			12,501		4.45
Less: Allowance for loan losses		(3,323	)							(3,706	)
Total non-earning assets		42,594								35,043
Total Assets	$	445,812							$	410,991
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	80,326		$	92		0.15	%	$	74,157		$	107		0.19	%
Money market savings		62,934			122		0.26			63,958			156		0.33
Regular savings		35,430			107		0.40			28,555			98		0.46
Time Deposits		138,620			1,082		1.04			133,340			947		0.95
FHLB borrowings		25,452			278		1.44			21,949			275		1.65
Other borrowings		1,322			16		1.62			1,276			11		1.17
Total interest bearing liabilities		344,084			1,697		0.66			323,235			1,594		0.66
Non-interest bearing liabilities:
Demand deposits		55,215								45,430
Other liabilities		1,894								1,043
Total liabilities		401,193								369,708
Total HomeTown Bankshares Corporation stockholders’ equity		44,380								41,283
Non-controlling interest in consolidated subsidiary		239			—					—			—
Total Liabilities and Stockholders’ Equity	$	445,812			1,697				$	410,991			1,594
Net interest income				$	11,409							$	10,907
Interest rate spread							3.70								3.79
Interest expense to average earning assets							0.56								0.56
Net interest margin							3.80	%							3.89	%

(1) Income and yields are reported on a tax equivalent basis assuming a federal income tax rate of 34 percent.

27

	Nine months Ended September 30, 2015 Compared to Nine months Ended September 30, 2014
	Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	—		$	—		$	—
Deposits in banks		(2	)		3			(5	)
Securities, taxable		(218	)		(83	)		(135	)
Securities, nontaxable		10			(18	)		28
Restricted equity securities		10			4			6
Loans held for sale		7			(2	)		9
Loans		798			(294	)		1,092
Total interest income		605			(390	)		995
Interest expense:
Interest bearing liabilities:
Checking		(15	)		(23	)		8
Money market savings		(34	)		(32	)		(2	)
Regular savings		9			(14	)		23
Time Deposits		135			63			72
FHLB borrowings		3			(37	)		40
Other borrowings		5			(3	)		8
Total interest expense		103			(46	)		149
Net interest income	$	502		$	(344	)	$	846

The net interest margin for the nine months ended September 30, 2015 was 3.80%, compared to 3.89% for the same period in 2014. The yield on earning assets declined 9 basis points during this time. The yield on loans was 4.67% and 4.84% for the nine months ended September 30, 2015 and 2014, respectively. The lower yields reflect the fact that interest rates on new and repricing loans have been less in 2015 than 2014.The cost of funds was 0.56% for the nine months ended September 30, 2015 and 2014. There were a few downward adjustments of interest bearing deposit rates in 2015, which were partially offset by the higher cost of time deposits. In order to provide funding for loan growth, two CD promotions have been offered since September, 2014. During the last quarter of 2014, the Company offered a competitive 27 month CD with a rate of 1.245% which helped stem the out flow from maturing CD’s and attracted additional funding. As the result of continued strong loan growth in 2015, a CD promotion was launched in the second quarter of 2015 offering a rate of 1.10% for 14 months.

The Federal Reserve has not raised interest rates since 2006. At the October 28, 2015 meeting, the Federal Open Market Committee (FOMC) voted to leave their target range for fed funds at 0.00% to 0.25% for the 55^th consecutive meeting. The statement specifically mentioned assessing progress towards its objective of maximum employment and 2 percent inflation at the next meeting to evaluate whether to raise rates.

No provision for loan losses was recorded in the first nine months of 2015. For the first nine months of 2014, a provision for loan losses of $202 thousand was recorded. See discussion under Allowance for Loan Losses for additional information.

For the year to date through September 30, 2015, noninterest income totaled $1.9 million, an increase of $571 thousand or 42.6% over the same period last year. Higher mortgage banking income in 2015 accounted for $390 thousand of the increase in noninterest income. The RVAR reported sales of 3,576 for the first nine months of 2015 compared to 3,104 during the same time period of 2014. Also an unexpected drop in long term interest rates in the first quarter of 2015 caused the pace of mortgage refinancing to increase significantly during the first few months of 2015. Growth in the number of core deposit accounts resulted in increased service charge income on deposit accounts, and ATM and interchange income. In total these items were up $136 thousand over last year.Other income was $101 thousand higher for the first nine months of 2015 compared to the same period last year, due to increases in merchant processing income and the increase in the value of Bank Owned Life Insurance, due in part to the inclusion of additional executive officers in 2015 . Gains on sales of securities were $56 thousand less in the nine months ended September 30, 2015 compared to the same period in 2014.

Year to date September 30, 2015, noninterest expense was $9.7 million, $1.1 million or 13.1% more than the $8.5 million recorded in the same period last year. Salaries and employee benefits through September 30, 2015 were $4.8 million compared to $4.3 million last year. The $498 thousand or 11.6% increase was due to several factors. The new Salem branch opened for business on July 28, 2014. Staffing of the new Salem branch accounted for $31 thousand of the increase for the current year over the prior year. Stock deferred compensation expense was $93 thousand higher in 2015 than the prior year primarily as the result of stock options issued at the end of 2014. The cost of stock based compensation is measured as of the date of grate and recognized as expense on a straight-line basis over the requisite service period. Also the deferred compensation plan was expanded to include all senior executive officers. The remainder of the increase in salaries reflects annual cost of living and merit pay increases. Occupancy and equipment expense totaled $1.3 million through September 30, 2015, an increase of $197 thousand or 17.5% over last year. Expansion of operations accounted for much of the increase. The new Salem branch opened for business on July 28, 2014 and accounted for $31 thousand, and the Operations Center accounted for $103 thousand of the increase. Some of the costs at the Operations Center were for major repairs that are not considered a normal recurring monthly expense. Marketing expenses were accelerated in 2015 and through September were $176 thousand higher than the prior year to take advantage of competitive opportunities in the local banking market. On September 30, 2014, HomeTrust Bancshares, headquartered in Asheville, N.C., entered the Roanoke market by opening a commercial loan production office in Roanoke, and in the second half of 2014 by buying all of the Bank of America branches in the Roanoke and New River Valleys. In November 2014, Valley Bank announced its sale to the Bank of North Carolina. The merger was consummated on July 1, 2015. With the completion of the sale of Valley Bank, HomeTown Bank is now the largest community bank headquartered in the Roanoke Valley. Two foreclosed properties with a book value of $2.1 million were written down $140 thousand in the third quarter of 2015 due to obtaining sales contracts on these properties that are anticipated to close in the fourth quarter.

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Financial Condition

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.

At September 30, 2015, the Company had total assets of $473 million, up $44.8 million or 10.5% over total assets of $428 million at December 31, 2014.   At the end of the third quarter of 2015, net loans had increased $28.5 million or 8.7% over year end 2014. Cash and due from banks was $30.4 million at September 30, 2015, primarily as the result of a surge in commercial deposits at the end of the quarter. Considering the volatility of commercial deposits, the funds were retained in highly liquid assets.

The Company’s liabilities at September 30, 2015 totaled $427 million compared to $385 million at December 31, 2014, an increase of $42.5 million or 11.0%.   Deposits accounted for $37.6 million of the increase and FHLB borrowings accounted for another $4.9 million. The increase in deposits was due to core deposit growth, the aforementioned CD promotions, and volatility in commercial balances.

At September 30, 2015 and December 31, 2014, the stockholders’ equity of HomeTown Bankshares was $45.2 million and $43.2 million, respectively, an increase of $1.9 million or 4.5%. The change in stockholders’ equity in the first nine months of 2015 was mainly the result of net income.  

 Non-performing Assets

 Non-performing assets consist of nonaccrual loans, restructured loans, and repossessed and foreclosed assets.

(Dollars in thousands)	September 30, 2015		December 31, 2014
Real Estate:
Construction and land development	$	11	$	—
Residential 1-4 families		—		475
Commercial real estate		378		758
Commercial loans		47		—
Equity lines		—		—
Loans to individuals		—		21
Total nonperforming loans		436		1,254
Other real estate owned		6,708		6,986
Total nonperforming assets, excluding performing restructured loans		7,144		8,240
Performing restructured loans		6,523		6,052
Total nonperforming assets, including restructured loans	$	13,667	$	14,292

Three of the loans classified as nonaccrual and totaling $852 thousand at year end 2014 were returned to an accrual status during the second quarter of 2015 based on their performance. One borrower with two loans totaling $145 thousand were classified as nonaccrual during the third quarter. With the exception of the third quarter additions, the remaining loans that continued to be classified as nonaccrual at September 30, 2015 were making payments and were not past due at the end of the quarter; however they are remaining on nonaccrual until performance warrants return to accrual status.

Troubled debt restructurings (“TDR’s”) were comprised of six loans totaling $6.8 million at September 30, 2015.  Four of the six loans were performing in accordance with their restructured terms and were not on nonaccrual status.  The loan restructured into two TDR’s was included in nonaccrual loans at September 30, 2015 and December 31, 2014. For the nine months ended September 30, 2014, one loan was modified in a TDR. See Note 3 Loans for more information.

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2015 and December 31, 2014 are included in Note 5, and the activity in other real estate owned for the first nine months of 2015 and 2014 is also included in Note 5.

No gains or losses on sales of other real estate were recorded in the first nine months of 2015. Gains on sales of other real estate owned totaled $5 thousand for the nine months of 2014. There were writedowns of $140 thousand of other real estate owned during the nine months ended September 30, 2015, and none during the same period of 2014.

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Allowance for Loan Losses

The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. The allowance consists of three components: specific, general, and unallocated. Their adequacy is evaluated separately. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Based on the Company’s allowance for loan losses calculation and analysis at the end of the third quarter of 2015, no provision was recorded.  

Specific reserves are determined on a loan by loan basis and relate to loans classified as impaired. Management classifies loans as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.   Included in potentially impaired loan category are current “watch list” credits plus any additional credits which have been past due three or more times within the past 12-month period. Management individually reviews these potentially impaired loans based on generally accepted accounting principles (GAAP) related to receivables and makes a determination if the loan in fact is impaired. Management does not consider a loan impaired during a period of delay in payment if management expects the ultimate collection of all amounts due. If a loan is found to be impaired, an allowance is established when the collateral value less estimated cost to dispose, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan.Specific reserves for loans individually evaluated for impairment totaled $132 thousand and $141 thousand at September 30, 2015 and December 31, 2014, respectively.  Impaired loans totaled $8.0 million and $8.2 million at September 30, 2015 and December 31, 2014, respectively.   

The percentage of the allowance for loan losses to total loans was 0.92%, and 1.00% at September 30, 2015, and December 31, 2014, respectively.  Unallocated reserves were $97 thousand at September 30, 2015 and $184 thousand at December 31, 2014. Some surplus or unallocated reserve is desirable given the inherent weakness in this type of predictive analysis. The major indicators of loan quality have continued to be favorable; however a couple of factors were downgraded during the second quarter of 2015 due to changes in the local economy and competition. All factors remained stable during the third quarter of 2015.

Net charges offs continue to be relatively low and as a percent of average loans were 0.01% for the first nine months of 2015. Net charge offs as a percent of average loans were 0.12% for the year 2014. Nonperforming loans were 0.12% and 0.38% of total loans at the end of the third quarter of 2015 and at the end of 2014, respectively. The allowance for loan losses to nonaccrual loans was over 760% at September 30, 2015 and 266% at December 31, 2014.

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate

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

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

The Company’s asset based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $72.8 million at September 30, 2015, compared to $56.8 million at December 31, 2014, and $60.8 million at September 30, 2014.   Commercial noninterest bearing deposits were $20 million higher at September 30, 2015 than at December 31, 2014. Commercial deposits are by their nature highly volatile, and withdrawals may result in less liquidity in the future.

The Company’s primary source of funding is its retail deposit base. The Company aggressively markets in its trade area and seeks demand deposits through service-related tactics and savings deposits through competitive pricing tactics. If this funding source is not attractive either for reasons of maturity or pricing, alternative funding sources include Federal Home Loan Bank (FHLB) advances, brokered deposits, fed funds purchased and guidance lines of credit. The Company is approved to borrow 20% of our total assets from the FHLB subject to providing qualifying collateral.  At September 30, 2015, the Company had borrowed $24.9 million of the $34.9 million of lendable collateral value, leaving $10.0 million of unused credit immediately available. The Company also has an $8 million guidance line of credit to borrow against securities. The limit on this line is 15% of assets. In addition, the Company had $18.5 million of fed funds lines of credit available at September 30, 2015. At September 30, 2015, there were no advances outstanding on the fed funds or guidance lines.

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Capital

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. In July 2013, the Federal Reserve Bank issued revised final rules that made technical changes to its market risk capital rules to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final new capital rules required the Bank to comply with the following new minimum capital ratios, effective January 1, 2015: (1) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the previous requirement of 4%); (3) a total capital ratio of 8% of risk-weighted assets (unchanged from current requirement); and, (4) a leverage ratio of 4% of total assets.  The rule introduces the requirement of a new 2.5% capital conservation buffer, to be phased in beginning on January 1, 2016, and ending on January 1, 2019. Banking organizations without other supervisory issues that wish to distribute capital freely, such as in the payment of dividends for example, must maintain the new capital conservation buffer.

The Bank’s actual capital amounts and ratios are also presented in the following tables:

HomeTown Bank September 30, 2015	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	47,962		12.09	%	$	31,731		8.00	%	$	39,663		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)	$	44,640		11.25	%	$	17,849		4.50	%	$	25,781		6.50	%
Tier I Capital (to Risk-Weighted Assets)	$	44,649		11.26	%	$	23,798		6.00	%	$	31,731		8.00	%
Tier I Leverage (to Average Assets)	$	44,649		9.74	%	$	18,332		4.00	%	$	22,916		5.00	%

HomeTown Bank December 31, 2014	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands except for percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	45,695		13.00	%	$	28,125		8.00	%	$	35,157		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		NA		NA			NA		NA			NA		NA
Tier I Capital (to Risk-Weighted Assets)	$	42,363		12.05	%	$	14,063		4.00	%	$	21,094		6.00	%
Tier I Capital (to Average Assets)	$	42,363		10.00	%	$	16,952		4.00	%	$	21,190		5.00	%

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 September 30, 2015 outstanding commitments to extend credit including letters of credit were $92.0 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 June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)”, should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

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In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in 3 parts. Among other things, Part 1 amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent 5 percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and nonparticipant-directed investments. Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts 1 and 2 of this ASU are effective on a retrospective basis and Part 3 is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact that ASU 2015-12 will have on its consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting).” On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the Codification. The Company does not expect the adoption of ASU 2015-15 to have a material impact on its consolidated financial statements.

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In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its consolidated financial statements.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.         CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.)  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, 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

None

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 September 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015, and 2014;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014; 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: November 13, 2015	By:	/S/ SUSAN K. STILL
		Susan K. Still
		President
		Chief Executive Officer
Date: November 13, 2015	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 September 30, 2015, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015, and 2014;  (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014; 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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