HMTA Hometown Bankshares Corp.

NASDAQ ListingHomeTown Bankshares Corporation listed with the NASDAQ Capital Markets under the trading symbol “HMTA” on October 12, 2016 when the stock price closed at $8.95. Since listing, the Company’s stock has received enhanced exposure, increased trading volume, and higher closing prices with a high of $11.00, an average of $9.39, and most recent closing price of $9.87 as of February 23, 2017.

Net income attributable to HomeTown Bankshares Corporation (the “Company”) (NASDAQ:HMTA) for 2016 totaled $2.5 million and was $1 million less than the prior year.  Excluding nonrecurring charges to write off the deferred tax asset related to expired stock options of $236 thousand and charge-off of a large credit of $606 thousand ($400 thousand after tax) in 2016, the nonrecurring gain of $348 thousand ($230 thousand after tax) from the sale of a building in 2015, net income for 2016 was slightly less than prior year.  Organic balance sheet growth during 2016 resulted in total assets passing the $500 million threshold on June 30, 2016, increasing to $517 million at the end of the year.  The expansion of earning assets and core deposits positioned the Company to increase revenue from net interest income and noninterest deposit related fee income during 2016 and future years.  The benefit of expansion was partially negated by competition, and gradually increasing interest rates pressuring the spread between loan yields and funding costs.  Profitability was lowered by the recordation of a provision for loan losses of $1.1 million in 2016 to accommodate loan growth and included the specific loan loss provision of $606 thousand related to one loan. No provision for loan losses was booked in 2015.  Improving credit quality came at a cost to earnings in 2016; losses and write-downs of other real estate owned were incurred as the portfolio of foreclosed properties decreased to $3.8 million on December 31, 2016 from $5.2 million on the same day in 2015 and a high of $10.1 million at the end of the third quarter of 2012. 

Basic earnings per common share was $0.45 for 2016, and $0.79 for 2015; compared to the diluted earnings per common share of $0.37 and $0.62 for 2016 and 2015, respectively.  In June 2016, the remaining 13,600 shares of Series C preferred stock were converted into 2,176,000 of common shares.  The impact on the basic earnings per share of the preferred share conversion was twofold.  The conversion saved the Company the 6% dividend or $408 thousand that would have been paid to preferred shareholders during the second half of 2016.  However, the conversion increased the weighted average common shares outstanding.  The dilutive nature of the preferred shares was factored into the diluted earnings per common share calculation before the conversion.  The diluted earnings per common share were less for 2016 than 2015 due to the decrease in net income available to common shareholders. 

“While earnings were lower in 2016 due to certain nonrecurring charges, taking advantage of several OREO sale opportunities and additional interest costs from a capital raise in late 2015, we are extremely pleased with our strong organic expansion of market share again during 2016 and our ability to take advantage of the competitive disruption in our market,”  said Susan Still, President and CEO.

RevenueRecord revenue of $22.0 million was realized for the year ended December 31, 2016, up $1.8 million or 9% over 2015, which included $5.8 million in core revenues realized during the fourth quarter of 2016 - 8% higher than 2015. Higher core revenues were generated from commercial loans, private banking loans as well as non-interest income from treasury and merchant services, title insurance, secondary mortgages and brokerage services.

Net Interest IncomeNet interest income in the fourth quarter 2016 increased $222,000 to $4.2 million from the fourth quarter of 2015 with a $766,000 increase or 5% to $16.2 million for the 2016 fiscal year vs. $15.4 million earned for the 2015 fiscal year.  Higher loan volume helped to offset the income from maturing, higher rate loans as well as the more competitive interest rate environment during 2016.  The more competitive marketplace ultimately led to a 24 basis point decline in the net interest margin during 2016; 10 basis points due to subordinated debt that was issued in December 2015.

Noninterest IncomeCore noninterest income, net of nonrecurring gains in 2015, increased 10% to $782,000 in the fourth quarter of 2016 while core noninterest income of $2.8 million was realized for the fiscal year 2016, up 11% from $2.6 million realized for 2015, also net of nonrecurring gains.  The primary increase for 2016 was continued, double-digit growth in service charges from new deposit relationships as well as ATM and interchange income, mortgage income, and merchant services income.

Noninterest ExpenseNoninterest expense increased $554,000 in the fourth quarter 2016 vs. Q4 of 2015 due primarily to increased personnel and benefit costs, OREO charges, and increased data processing costs associated with new accounts and growing account activity.  Noninterest expense during the 2016 fiscal year increased 8% compared to 2015 due primarily to salary and benefit costs for additions to our two new lines of business - Private Banking and Merchant Services, as well as increased operations staffing and data processing costs to support new account growth. Costs associated with OREO sales contracted during 2016 resulted in a 28% reduction or $1.4 million in the OREO portfolio for the 2016 fiscal year. In spite of increased personnel costs and 40% longer operating hours than most of our competitors, we remain well below our industry peers in total personnel expense, above our peers in assets generated per employee and consistently better than our peers in total overhead-net of non-interest income.

LoansTotal loans were $419 million on December 31, 2016, up $15 million or 15% on an annualized basis for fourth quarter of 2016 and up $52 million or 14% over the prior year ended December 31, 2015.  Loan growth was driven by commercial loans, consumer as well as private banking loans.

DepositsTotal core deposits were up $14 million or 14% annualized during Q4 2016 while core deposit growth for the 2016 fiscal year was up $57 million and 16% over the 2015 fiscal year. Strong core deposit growth was achieved again in 2016 by strong growth in new banking relationships as well as growth in existing commercial and consumer accounts.  Conversely, increased liquidity from strong core deposit growth resulted in a 37% reduction in wholesale funding and associated interest expense.

CapitalCapital levels remained sound during 2016 with total stockholders’ equity increasing $1.8 million through December 31, 2016 over the previous year.  HomeTown Bank Common equity tier 1 capital, Total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 11.8%, 12.6%, 11.8% and 10.7%, respectively. All ratios continue to exceed the current regulatory standards for well-capitalized institutions.  The diluted book value per common share amounted to $8.30 on December 31, 2016 vs. $7.99 on December 31, 2015.

Credit QualityCredit quality improved and remained solid thru December 31, 2016 in spite of an addition to the provision for loan losses for a specific loan recognized during the second quarter as discussed above.

Nonperforming AssetsOREO balances continued to decrease significantly during 2016 – down $1.4 million or 28% on OREO sales and an additional $600,000 from a property that was contracted for sale in 2016, but not closed until January 2017. This resulted in an improvement in non-performing assets, excluding performing restructured loans, to 0.91% of total assets on December 31, 2016 vs. 1.18% on December 31, 2015.  Non-performing assets, including restructured loans, also improved significantly from 2.52% of total assets on December 31, 2015 to 2.10% on December 31, 2016. 

Past Due and Nonaccrual LoansPast due accruing loans amounted to 0.29% of total loans on December 31, 2016 vs. 0.39% in 2015 while nonaccruals increased to 0.22% of total loans on December 31, 2016 from 0.12% of total loans on December 31, 2015. 

Allowance for Loan LossesThe allowance for loan losses totaled $3.6 million on December 31, 2016 compared to $3.3 million on December 31, 2015.  Provisions for credit losses were $1.08 million for the fiscal year 2016 vs. $-0- for 2015 due to strong loan growth as well as the aforementioned provision incurred in the 2nd quarter as discussed above.

“Strong organic balance sheet growth in both loans and core deposits as well as double-digit growth in non-interest income resulted in record revenues during 2016,” said Still.  “In addition, our credit quality is sound and we remain well-capitalized,” continued Still. “In addition to our financial performance, our current and future success continues to be based on our hiring and retaining the best bankers in each of the communities we serve,” she said.

Forward-Looking Statements:

Certain statements in this press release may be “forward-looking statements.”  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results that are not statements of historical fact and that involve significant risks and uncertainties.  Although the Company believes that its expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results will not differ materially from any future results implied by the forward-looking statements.  Actual results may be materially different from past or anticipated results because of many factors, some of which may include changes in economic conditions, the interest rate environment, legislative and regulatory requirements, new products, and competition, changes in the stock and bond markets and technology.  The Company does not update any forward-looking statements that it may make.

(See Attached Financial Statements for quarter ending December 31, 2016)

HomeTown Bankshares Corporation
Consolidated Condensed Balance Sheets
December 31, 2016; and December 31, 2015
		December 31,				December 31,
In Thousands		2016				2015
Assets		(Unaudited)
Cash and due from banks	$	18,229			$	28,745
Federal funds sold		42				1,329
Securities available for sale, at fair value		52,975				52,544
Restricted equity securities, at cost		2,213				2,535
Loans held for sale		678				1,643
Total loans		418,991				367,358
Allowance for loan losses		(3,636	)			(3,298	)
Net loans		415,355				364,060
Property and equipment, net		13,371				14,008
Other real estate owned, net		3,794				5,237
Other assets		10,633				9,284
Total assets	$	517,290			$	479,385
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	91,354			$	77,268
Interest-bearing		359,494				322,278
Total deposits		450,848				399,546
Federal Home Loan Bank borrowings		8,000				22,000
Subordinated notes		7,224				7,194
Other borrowings		1,117				2,361
Other liabilities		1,876				1,893
Total liabilities		469,065				432,994
Stockholders’ Equity:
Preferred stock		-				12,893
Common stock		28,765				16,801
Surplus		17,833				15,484
Retained surplus		1,247				443
Accumulated other comprehensive (loss) income		(56	)			396
Total HomeTown Bankshares Corporation stockholders’ equity		47,789				46,017
Noncontrolling interest in consolidated subsidiary		436				374
Total stockholders’ equity		48,225				46,391
Total liabilities and stockholders’ equity	$	517,290			$	479,385

HomeTown Bankshares Corporation
Consolidated Condensed Statements of Income
For the Three and Twelve Months Ended December 31, 2016 and 2015
	For the Three Months						For the Twelve Months
	Ended December 31,						Ended December 31,
In Thousands, Except Share and Per Share Data	2016			2015			2016			2015
		(Unaudited)			(Unaudited)		(Unaudited)
Interest income:
Loans and fees on loans	$	4,595		$	4,255		$	17,711		$	16,374
Taxable investment securities		223			189			837			741
Nontaxable investment securities		93			102			388			405
Other interest income		58			49			238			181
Total interest income		4,969			4,595			19,174			17,701
Interest expense:
Deposits		587			495			2,216			1,898
Other borrowed funds		179			119			802			413
Total interest expense		766			614			3,018			2,311
Net interest income		4,203			3,981			16,156			15,390
Provision for loan losses		103			-			1,082			-
Net interest income after provision for loan losses		4,100			3,981			15,074			15,390
Noninterest income:
Service charges on deposit accounts		173			161			669			523
ATM and interchange income		179			159			670			575
Mortgage banking		247			164			854			703
Gains on sales of investment securities		-			-			257			52
Gain on sale of building and land		-			348			-			348
Other income		183			228			651			770
Total noninterest income		782			1,060			3,101			2,971
Noninterest expense:
Salaries and employee benefits		1,886			1,728			6,981			6,529
Occupancy and equipment expense		416			432			1,733			1,757
Advertising and marketing expense		135			84			480			691
Professional fees		142			83			494			386
Losses on sales, and writedowns of other real estate owned, net		404			206			495			346
Other real estate owned expense		25			46			97			151
Other expense		1,033			908			3,874			3,295
Total noninterest expense		4,041			3,487			14,154			13,155
Net income before income taxes		841			1,554			4,021			5,206
Income tax expense		237			487			1,440			1,595
Net income		604			1,067			2,581			3,611
Less net income attributable to non-controlling interest		13			7			62			57
Net income attributable to HomeTown Bankshares Corporation		591			1,060			2,519			3,554
Effective dividends on preferred stock		-			210			408			840
Net income available to common stockholders	$	591		$	850		$	2,111		$	2,714
Basic earnings per common share	$	0.10		$	0.25*		$	0.45		$	0.79*
Diluted earnings per common share	$	0.10		$	0.18*		$	0.37		$	0.62*
Weighted average common shares outstanding		5,763,839			3,450,231*			4,652,853			3,432,457*
Diluted average common shares outstanding		5,774,308			5,758,127*			5,776,292			5,756,586*
*Restated for the 4% stock dividend distributed July 11, 2016

HomeTown Bankshares Corporation		Three				Three				Twelve				Twelve
Financial Highlights		Months				Months				Months				Months
In Thousands, Except Share and Per Share Data		Ended				Ended				Ended				Ended
		Dec 31				Dec 31				Dec 31				Dec 31
		2016				2015				2016				2015
PER SHARE INFORMATION		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Book value per share, basic	$	8.30				$	9.47	*		$	8.30			$	9.47	*
Book value per share, diluted	$	8.30				$	7.99	*		$	8.30			$	7.99	*
Earnings per share, basic	$	0.10				$	0.25	*		$	0.45			$	0.79	*
Earnings per share, diluted	$	0.10				$	0.18	*		$	0.37			$	0.62	*
* Restated for the 4% stock dividend distributed July 11, 2016
PROFITABILITY
Return on average assets			0.46	%		0.88		%		0.50		%		0.78		%
Return on average shareholders' equity			4.87	%		9.15		%		5.31		%		7.94		%
Net interest margin			3.53	%		3.77		%		3.55		%		3.79		%
Efficiency			72.45	%		68.93		%		71.38		%		70.48		%
BALANCE SHEET RATIOS
Total loans to deposits			92.93	%		91.94		%		92.93		%		91.94		%
Securities to total assets			10.67	%		11.49		%		10.67		%		11.49		%
Common equity tier 1 ratio BANK ONLY			11.8	%		13.0		%		11.8		%		13.0		%
Tier 1 capital ratio BANK ONLY			11.8	%		13.0		%		11.8		%		13.0		%
Total capital ratio BANK ONLY			12.6	%		13.8		%		12.6		%		13.8		%
Tier 1 leverage ratio BANK ONLY			10.7	%		10.8		%		10.7		%		10.8		%
ASSET QUALITY
Nonperforming assets to total assets			0.91	%		1.18		%		0.91		%		1.18		%
Nonperforming assets, including restructured loans, to total assets			2.10	%		2.52		%		2.10		%		2.52		%
Net charge-offs to average loans (annualized)			0.01	%		0.02		%		0.19		%		0.01		%
Composition of risk assets: (in thousands)
Nonperforming assets:
Nonaccrual loans	$		924			$	426			$	924			$	426
Other real estate owned			3,794				5,237				3,794				5,237
Total nonperforming assets, excluding performing restructured loans			4,718				5,663				4,718				5,663
Restructured loans, performing in accordance with their modified terms			6,160				6,398				6,160				6,398
Total nonperforming assets, including performing restructured loans	$		10,878			$	12,061			$	10,878			$	12,061
Allowance for loan losses: (in thousands)
Beginning balance	$		3,544			$	3,313			$	3,298			$	3,332
Provision for loan losses			103				-				1,082				-
Charge-offs			(42	)			(20	)			(848	)			(80	)
Recoveries			31				5				104				46
Ending balance	$		3,636			$	3,298			$	3,636			$	3,298

For more information contact:
Susan K. Still, President and CEO, 540-278-1705
Vance W. Adkins, Executive Vice President and CFO, 540-278-1702