10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2017

☐ 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 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, including area code (540) 345-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $5.00 par value per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5.00 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No   ☒

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 preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2017. $57,945,887, based on $10.75 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date 5,800,683 shares outstanding as of March 29, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 15, 2018 are incorporated by reference in Part III.

HOMETOWN BANKSHARES CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	7
Item 2.	Properties	7
Item 3.	Legal Proceedings	8
Item 4.	Mine Safety Disclosures	8
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6.	Selected Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58
Item 9A.	Controls and Procedures	58
Item 9B.	Other Information	58
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	58
Item 11.	Executive Compensation	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	59
Item 13.	Certain Relationships and Related Transactions, and Director Independence	59
Item 14.	Principal Accounting Fees and Services	59
PART IV
Item 15.	Exhibits, Financial Statement Schedules	60
Item 16.	Form 10-K Summary	60

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PART I

ITEM  1. BUSINESS.

Overview and History

General

HomeTown Bankshares Corporation (the “Company”, “HomeTown Bankshares”) was incorporated in the Commonwealth of Virginia on December 8, 2008. On September 4, 2009, the Company acquired all of the outstanding shares of HomeTown Bank in a one for one exchange of stock.

The Company is authorized as a bank holding company. The holding company structure provides greater flexibility than a bank standing alone because it allows expansion and diversification of business activities through subsidiaries or through acquisitions. HomeTown Bankshares Corporation’s business is conducted through its wholly-owned subsidiary, HomeTown Bank.

HomeTown Bank

HomeTown Bank (the “Bank”) is a Virginia banking corporation headquartered in Roanoke, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 2004 and began banking operations in November 2005. The Bank was organized to engage in general retail and commercial banking business.

The Bank opened for business on November 14, 2005 and was capitalized by more than 2,000 shareholders who wanted a new local bank dedicated to customer service. These investors provided the initial customer base and are integral to the success of the Bank. Management believes that the key to the Bank’s success lies in providing Bank customers with personalized service from experienced banking professionals while providing innovative, highly competitive and convenient products and services that meet their banking needs. In 2013 the Bank began operating a mortgage joint venture with another entity. The Bank’s ownership interest in HomeTown Residential Mortgage, LLC is 49%. 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 a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and larger companies. The Bank provides a full range of services to meet the financial needs of its customers and strives to provide its customers with innovative products while maintaining the prompt response and the high level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area. Management believes that the combination of local ownership and size allows the Bank to offer services and products specifically tailored to the needs of the community. The Bank’s Principal Office is located at 202 S. Jefferson Street, Roanoke, Virginia. The Bank maintains its primary website at www.hometownbank.com.

Principal Products of the Bank

The Bank offers a full range of banking services to small and medium-size businesses, real estate investors and developers, private investors, professionals and individuals.  In addition to its main office, the Company has full-service 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, at 852 West Main Street.

Deposit Services. The Bank offers a full range of deposit services that are typically available in most banks, savings banks and credit unions including checking accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. From the beginning, the Bank has focused on convenience, innovation, and value. The transaction accounts and time certificates are tailored to the Bank’s market area at rates competitive to those offered in the area. In addition, the Bank offers its customers Individual Retirement Accounts (IRAs). All deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowed by law (generally, $250,000 per depositor, subject to aggregation rules). The Bank solicits such accounts from individuals, businesses, and associations and organizations.

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The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”). CDARS and ICS enable the Bank to offer our deposit customers access to FDIC insurance in amounts exceeding the existing FDIC limit. This permits our institution to better attract and retain large deposits from businesses, nonprofit organizations, individuals and other customers that require an assurance of safety.

Lending Services. The Bank also offers a full range of short-to-medium term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans and lines of credit include secured and unsecured loans for financing automobiles, home improvements, education and personal investments. Additionally, the Bank originates fixed and floating-rate mortgage loans and real estate construction and acquisition loans.

Consumer Residential Mortgage Origination. The Bank has expanded their residential mortgage origination operations over the last few years. Initially, the Bank originated loans as a representative for mortgage companies. Then, in February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office.  In 2013 HomeTown Bank entered into a joint venture agreement with a mortgage company as 49% owner of HomeTown Residential Mortgage, LLC. The new entity began operations at the end of 2013, absorbing the Bank’s mortgage office employees and continued working from the Colonial Avenue office. The mortgage office operates under the name HomeTown Mortgage and coordinates the Bank’s existing mortgage services and offers mortgages, refinancing, and other services. In 2016, an additional mortgage banker was hired and is based at the Christiansburg branch in order to better serve the New River Valley market. Loans originated are conforming home mortgages in its market area, as defined below. As part of the Bank’s overall risk management strategy, loans originated and closed by the mortgage office are pre-sold to major national mortgage banking or financial institutions. In addition to creating customer relationships and the opportunity to sell other products and services, the bank receives fee income for this service.

Investment Services. HomeTown Investment Services, Inc., opened in April 2013, 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 LPL Financial, Member FINRA/SIPC. HomeTown Investment Services, Inc. is a subsidiary of the Bank. Products and services made available through LPL Financial 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.  Revenue from investment services is comprised mostly of fees based upon the market value of the accounts under administration as well as commissions on investment transactions.

Private Banking. At the end of 2015, the Bank began offering personalized banking solutions to work with customers to clarify financial goals and bring together professionals to satisfy their investment, credit and other financial needs. Revenue from private banking management activities is comprised mostly of interest income earned on loans and service charges and fees from deposit products. 

Merchant Card Services. The Bank offers comprehensive payment processing solutions giving businesses the ability to accept all major credit cards, either at a terminal, online, via a mobile device or tablet, or over the phone.

Other Services. Other services offered by the Bank include safe deposit boxes, traveler’s checks, and direct deposit of payroll, and social security checks, automatic drafts for various accounts, overdraft protection, check cards, and credit cards. The Bank also has become associated with a shared network of automated teller machines (ATMs) that may be used by Bank customers throughout the world. The Bank intends to introduce new products and services as permitted by the regulatory authorities or desired by the public. The Bank remains committed to meeting the challenges that require technology. The Bank provides its customers with access to the latest technological products, such as internet banking, including on-line bill pay and mobile banking. The services allow customers to handle routine transactions using the internet at the Bank’s website www.hometownbank.com or on their mobile phones.

Market Area

The Bank’s market area primarily consists of the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Botetourt, Bedford, Franklin and Montgomery. Total population in the market area is approximately 450,000. The area is serviced by one daily newspaper, at least 6 weekly, multi-weekly or bi-weekly newspapers and a number of radio and television stations providing diverse media outlets. The City of Roanoke and Roanoke County, the location of three of the Bank’s offices, has the largest population base, with approximately 190,000 persons. The Roanoke market area is diversified by industry groups with services, retail trade, manufacturing, construction, transportation, utilities, finance, insurance and real estate. Roanoke is a regional center for banking, medicine and the legal and business professional community. Carilion Clinic, Veterans Affairs, Kroger, and HCA Virginia Health System are among Roanoke’s largest private employers. Other major employers are the local school boards, municipal governments, and universities including Virginia Tech, Roanoke College, and Hollins University.

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Employees

As of December 31, 2017, the Company had 108 employees, including 107 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements, and relations with employees are considered positive.

Governmental Monetary Policies

The earnings and growth of the Company are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board implements national monetary policy by its open market operations in United States government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial institutions’ deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits. Management of the Company is unable to predict the effect of possible significant changes in monetary policies upon the future operating results of the Company.

Competition

The Company competes as a financial intermediary with other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Roanoke market area and elsewhere. Many of the Company’s nonbank competitors are not subject to the same extensive federal regulations that govern federally insured banks and state regulations governing state chartered banks. As a result, such nonbank competitors may have certain advantages over the Company in providing certain services.

Increased competition has come from out-of-state banks through their acquisition of Virginia-based banks and interstate branching, and expansion of community and regional banks into our service areas. Consequently, the Company’s market area is a highly competitive, highly branched banking market. Competition, for loans to individuals, small businesses, and professional concerns, is keen in the Company’s target market, and pricing is important. Most of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services, such as extensive and established branch networks and trust services that the Company is not currently providing. Moreover, larger institutions operating in the Roanoke market area have access to borrowed funds at a lower cost than are presently available to the Company. Deposit competition is strong and comes from institutions in the market, U.S. Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors, among other sources.

Cyber Security

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.

Supervision and Regulation

HomeTown Bankshares Corporation

HomeTown Bankshares is a bank holding company organized under the Federal Bank Holding Company Act of 1956 (“BHCA”), which is administered by the Federal Reserve Board. HomeTown Bankshares is required to file an annual report with the Federal Reserve Board and may be required to furnish additional information pursuant to the BHCA. The Federal Reserve Board is authorized to examine HomeTown Bankshares and its subsidiary.

The Bank Holding Company Act. Under the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve Board has found those activities to be incidental to banking. Bank holding companies also may not acquire more than 5% of the voting shares of any company engaged in nonbanking activities. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve Board before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares.

Virginia State Corporation Commission. All Virginia bank holding companies are required to register with the Virginia State Corporation Commission (the “Commission”). HomeTown Bankshares is required to report to the Commission with respect to financial condition, operations and management. The Commission may also make examinations of any bank holding company and its subsidiaries.

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The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits significant combinations among different sectors of the financial services industry, allows for expansion of financial service activities by bank holding companies and offers financial privacy protections to consumers. GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. GLBA permits affiliations between banks and securities firms in the same holding company structure, and it permits financial holding companies to directly engage in a broad range of securities and merchant banking activities. HomeTown Bankshares is not a financial holding company.

The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (“SOX”) enacted sweeping reforms of the federal securities laws intended to protect investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including HomeTown Bankshares. SOX creates increased responsibilities for chief executive officers and chief financial officers with respect to the content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission rules focused increased scrutiny by internal and external auditors on HomeTown Bankshares’ systems of internal controls over financial reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and criminal penalties for violations of securities laws.

Capital Requirements. The Federal Reserve Board adopted risk-based capital guidelines that are applicable to HomeTown Bankshares. The guidelines provide that the Company must maintain a minimum ratio of 8% of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit). At least half of total capital must be comprised of Tier 1 capital, for a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines of 4% for banks that meet certain specified criteria. The leverage ratio is the ratio of Tier 1 capital to total average assets, less intangibles. HomeTown Bankshares is expected to be a source of capital strength for its subsidiary bank, and regulators can undertake a number of enforcement actions against HomeTown Bankshares if its subsidiary bank becomes undercapitalized. HomeTown Bankshares’ bank subsidiary is well capitalized and fully in compliance with capital guidelines. However, regulatory capital requirements relate to earnings and asset quality, among other factors. Bank regulators could choose to raise capital requirements for banking organizations beyond current levels.

On July 2, 2013, the Federal Reserve Board of Governors approved the final Basel III risk-based capital rule. This rule aims to improve the quality and quantity of capital for all banking organizations and provides a new regulatory framework for U.S. banking organizations which is consistent with international standards. Community banking organizations first became subject to the final Basel III rule on January 1, 2015. Thereafter begins a phase-in period through January 1, 2019. The new rule implements higher minimum capital requirements and emphasizes the use of common equity through the introduction of a new capital ratio: common equity tier 1 (CET1). In addition, the new rule establishes stricter eligibility for capital instruments included in CET1, and additional tier 1 capital or tier 2 capital. 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 new rule emphasizes common equity as the preferred capital instrument and limits the inclusion of intangible assets, including mortgage servicing assets and deferred tax assets in the capital of financial institutions. The new capital rule addresses the Dodd-Frank Act prohibition on reliance on external credit ratings specified in the regulations of the federal banking agencies. Consequently, the new capital rule replaces the previous credit-rating-based risk-weighting approach of certain assets with a simplified supervisory formula approach.

The Dodd-Frank Act The financial regulatory reform legislation “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) was signed into law on July 21, 2010. The Dodd-Frank Act implements financial regulatory reform across the entire financial landscape and has far-reaching provisions including among other things:

• Creates a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. As a smaller institution, most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the Federal Reserve Board and to the Bank by the FDIC.

• Applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

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• Changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminates the ceiling on the size of the Deposit Insurance Fund and increases the floor of the size of the Deposit Insurance Fund.

• Requires loan originators to retain 5 percent of any loan sold or securitized, unless it is a “qualified residential mortgage”, which must still be defined by the regulators. Federal Housing Administration, Veterans Affairs and Rural Housing Service loans are specifically exempted from the risk retention requirements.

• Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders that apply to all public companies not just financial institutions.

• Makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

• Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

• Amends the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While the Company is not directly subject to these rules for as long as the Company’s assets do not exceed $10 billion, the Company’s activities as a debit card issuer may be indirectly impacted, potentially requiring the Company to match new lower fee structures implemented by larger financial institutions in order to remain competitive.

The Dodd-Frank Act is the largest piece of financial legislation ever passed, exceeding 2,000 pages in length. Many provisions of the Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers, or the financial industry as a whole. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

HomeTown Bank

The Bank is under the supervision of, and subject to regulation and examination by, the Federal Reserve Board and the Bureau of Financial Institutions of the Virginia State Corporation Commission. The Bank is also covered by deposit insurance through the FDIC and is subject to their regulations. As such, the Bank is subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and establishment of branch offices.

Deposit Insurance. HomeTown Bank has deposits that are insured by the FDIC. The FDIC maintains a Deposit Insurance Fund (“DIF”) that is funded by risk-based insurance premium assessments on insured depository institutions. Assessments are determined based upon several factors, including the level of regulatory capital and the results of regulatory examinations. The FDIC may adjust assessments if the insured institution’s risk profile changes or if the size of the DIF declines in relation to the total amount of insured deposits. It is anticipated that assessments will increase in the future due to the anticipated growth of the Bank.

On April 1, 2011, the deposit insurance assessment base changed from total deposits to average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act, which also requires the FDIC to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depositary institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act permanently increased the maximum deposit insurance amounts for banks, savings institutions and credit unions to $250,000 per depositor.

Capital Requirements. The same capital requirements that are discussed above with relation to HomeTown Bankshares are applied to HomeTown Bank by the Federal Reserve Board. Federal Reserve Board guidelines provide that banks experiencing internal growth or making acquisitions are expected to maintain strong capital positions well above minimum levels, without reliance on intangible assets. Also, capital requirements can be increased based on earnings and asset quality concerns as well as other issues.

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Mergers and Acquisitions. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve Board before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorizes the Federal Reserve Board to permit adequately capitalized and adequately managed bank holding companies to acquire all or substantially all of the assets of an out-of-state bank or bank holding company, subject to certain conditions, including nationwide and state concentration limits. Banks also are able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia law permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

Community Reinvestment Act (“CRA”). The Company is also subject to the requirements of the CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to a number of assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open branches.

Volcker Rule. The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests over certain thresholds in private equity and hedge funds. Final rules implementing the Volcker Rule were adopted on December 10, 2013. The final rules require entities to establish internal compliance programs which may include making regular reports about those activities to regulators. The final rules were effective April 1, 2015, with full compliance being phased in over a period which ended on July 21, 2016.  The Volcker Rule has been subject to much commentary from the banking industry and the Company continues to evaluate the impact the Rule will have on the industry and the Company in particular.

Safety and Soundness. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.

Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a limited partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions, including the filing of misleading or untimely reports with regulatory authorities, may provide the basis for enforcement action.

USA Patriot Act. The USA Patriot Act became effective on October 26, 2001, and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. Interim rules implementing the USA Patriot Act were issued effective March 4, 2002. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. 

Consumer Laws and Regulations. There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. HomeTown Bank is required to comply with these laws and regulations in its dealing with customers.

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ACCESS TO FILINGS

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Also, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are posted on the Company’s website at http://www.hometownbank.com as soon as reasonably practical after filing electronically with the SEC.

 Executive Officers of the Registrant

The following table shows the Company’s executive officers as of March 30, 2018 and their areas of responsibility. The executive officer biographies follow the table.

Name	Age	Position
Susan K. Still	64	President & CEO
Vance W. Adkins	37	Executive Vice President & CFO

Susan K. Still has served as President and Chief Executive Officer of the Company since May 2008. Ms. Still is also a member of the Company’s board of directors and served as the Bank’s Chief Lending Officer from November 2005 to May 2008.

Vance W. Adkins has served as Executive Vice President and Chief Financial Officer of the Company since August 2016. Mr. Adkins served as the Company’s Senior Risk Officer from October 2010 to August 2016.

ITEM 1A. RISK FACTORS.

Not Required.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not Required.

ITEM 2. PROPERTIES.

As of March 30, 2018, the Company through its wholly owned subsidiary HomeTown Bank (the “Bank”), conducted its business from the following six locations: i) 202 S. Jefferson Street Roanoke, Virginia (the “Downtown Office”), which also serves as the Bank’s main office and operations processing center; ii) a branch office located at 13400 Booker T. Washington Highway, Moneta, Virginia (the “Smith Mountain Lake Office”); iii) a branch office at 4225 Colonial Avenue, Roanoke, Virginia (the “Colonial Avenue at 419 Office”); iv) a branch office at 3521 Franklin Road, Roanoke, Virginia (the “South Roanoke Office”); v) a branch office at 2950 Market Street, Christiansburg, Virginia (the “Christiansburg Office”); vi) a branch office at 852 West Main Street, Salem, Virginia (the “Salem Office”).

The Downtown Office. The Bank leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia. The original lease expired on December 31, 2016, which provided an option to extend the lease for two additional five-year periods. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for one additional ten-year term at expiration. The Downtown Branch opened on November 14, 2005. 

The Smith Mountain Lake Office. The Bank purchased the Smith Mountain Lake branch on February 14, 2006 and received regulatory approval and opened the office on May 8, 2006.

The Colonial Avenue at 419 Office. The Bank purchased the property for the Colonial Avenue at 419 office on August 31, 2006 and received regulatory approval and opened the Colonial Avenue at 419 Branch on March 22, 2007. In February, 2012, the Bank opened a dedicated mortgage office, on Colonial Avenue, next to the existing branch office.  

The South Roanoke Office. The Bank leases real property and improvements thereto located at 3521 Franklin Road, Roanoke, Virginia. The Bank received regulatory approval and opened a branch at this location on July 9, 2007. The initial lease was for a period of ten years from August 1, 2006. Upon expiration on July 31, 2016 the lease was extended for two additional five-year periods. 

The Christiansburg Office. The Bank purchased property at 2950 Market Street, Christiansburg on May 26, 2010. The Bank broke ground in December 2012 on a new 9,000 square foot branch. At the end of 2013 the Bank relocated their New River Valley branch operations and mortgage and administrative operations to the new building. The larger facility enables the Bank to meet the growing needs of its customers in the New River Valley and to attract new business. The Bank began operations in the New River Valley market in 2008. The leases for the previous locations, at 1540 Roanoke Street and 1655 Roanoke Street, Christiansburg, expired in 2013.

7

Salem Office. The Bank purchased property at 852 West Main Street, Salem on September 2, 2011. A stand-alone fully operational ATM was completed and put into service April 15, 2013, and on July 28, 2015, a full service branch office opened at this location. 

Market Square ATM. The Bank leases space at 1 Market Square, Roanoke for a cash dispensing ATM. The ATM was put into operation May 10, 2013, and is located at the newly renovated Center in the Square building, a cultural hub in downtown Roanoke.

Operations Center. 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 expansion. The Bank owned an office building, initially acquired through foreclosure, at 4633 Brambleton Avenue in Roanoke that could be converted to a secure Operations Center. The two story 12,000 square foot building was built in 2007. At a board meeting held on December 18, 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.

ITEM 3. LEGAL PROCEEDINGS.

The Bank is not involved in any material pending legal proceedings at this time, other than routine litigation incidental to its business, and the Company does not expect that such litigation will be material in respect to the amount in controversy.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information and Holders

Shares of the Company’s common stock, $5.00 par value per share, were listed and began trading on NASDAQ on October 12, 2016 under the symbol “HMTA.” The NASDAQ listing increases visibility to those outside of the Company’s core operating markets and enables current and future shareholders greater liquidity to trade shares. Prior to listing on NASDAQ, shares were not listed on any stock exchange, however were quoted on the Over the Counter Bulletin Board under the same stock symbol “HTMA”. Based on available information, the Company believes that from January 1, 2017 to December 31, 2017, the selling price of shares of its common stock ranged from $9.10 to $11.33, and that approximately 507 thousand shares were traded. There may, however, have been other transactions at other prices not known to the Company.

	2017				2016
Quarter Ended	High Close		Low Close		High Close		Low Close
March 31	$	11.00	$	9.10	$	10.40	$	9.00
June 30	$	10.75	$	9.52	$	9.70	$	9.30
September 30	$	11.00	$	10.60	$	9.45	$	8.70
December 31	$	11.33	$	10.82	$	9.25	$	8.80

As of March 29, 2018, there were 5,800,683 shares of the Company’s common stock outstanding, which shares were held by 2,187 shareholders of record. No cash dividends have been paid on the common stock to date.

Dividends

The Company is subject to certain restrictions imposed by the Federal Reserve Board and capital requirements of federal and Virginia banking statutes and regulations. The Company has never paid a cash dividend on its common stock. At December 31, 2017, the Company had retained earnings of $3.8 million. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.  

8

ITEM 6. SELECTED FINANCIAL DATA.

Not Required.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

• the ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;

• reliance on the Company’s management team, including its ability to attract and retain key personnel;

• interest rate fluctuations;

• maintaining capital levels adequate to support the Company’s growth;

• risk inherent in making loans such as repayment risks and fluctuating collateral values;

• the ability to attract low cost core deposits to fund asset growth;

• changes in laws and regulations applicable to us;

• changes in general economic and business conditions;

• competition within and from outside the banking industry;

• problems with our technology;

• changing trends in customer profiles and behavior; and

• new products and services in the banking industry.

Although the Company’s management believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of management’s knowledge of the Company’s business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Critical Accounting Policies

The financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements and management’s discussion and analysis are, to a large degree, dependent upon the Company’s accounting policies. The selection and application of these accounting policies involves judgments, estimates, and uncertainties that are susceptible to change.

Presented below is discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the Notes to Consolidated Financial Statements.

Allowance for Loan Losses

Management monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. Management maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

9

The bank maintains an internal risk grading system by which it grades loans based on guidelines for assessing the risk of each loan, and monitoring trends in portfolio quality. Those loans deemed to have a higher-than-average risk of loss are rated pass watch, special mention, substandard, doubtful, or loss, depending upon the severity of risk. Credits with these ratings are made part of the bank’s internal watch list and are closely monitored for changes in condition.

Credits rated special mention, substandard, or doubtful, are individually analyzed quarterly by Credit Administration by preparing a detailed Criticized Asset Reporting and Action Plan. An Accounting Standards Codification (ASC) 310 Reserve for Individually Evaluated Credit analysis is performed on loans with relationships in excess of $100,000 identified as impaired using the Fair Value of Collateral Method to determine if the value of the liquidated collateral will satisfy the outstanding loan balance. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.

For loans without individual measures of impairment, we make estimates of losses for groups of loans based primarily on historical losses grouped by similar characteristics, including the type of loan, the assigned loan classification and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. Management recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure.  Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties.  The Company may incur additional writedowns of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions. 

Deferred Tax Assets and Liabilities

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized.  "More likely than not" is defined as greater than a 50% chance.  Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. 

General

Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the financial condition and results of operations of the Company and the Bank as of and for the years ending December 31, 2017 and 2016. This discussion should be read in connection with the Company’s Consolidated Financial Statements and the accompanying Notes thereto included in this Form 10-K.

The Company initiated its banking operations through the Bank, on November 14, 2005 with the opening of its main office at 202 S. Jefferson Street, Roanoke, Virginia. The Bank has experienced consistent growth over the last ten years.

The Business

HomeTown Bank provides a full complement of consumer and commercial banking services to its primary service area which includes the City of Roanoke, Roanoke County, and the City of Salem, Virginia and contiguous counties, including Bedford, Franklin and Montgomery, Virginia. We place an emphasis on personal service and offer a broad range of commercial and retail banking products and services including checking, savings and time deposits, individual retirement accounts, residential and commercial mortgages, home equity loans, consumer installment loans, commercial loans, lines and letters of credit.

10

The Bank currently operates six full service branches, seven 24-hour ATM’s, and one mortgage office.  In addition to its main office, the Bank has branch offices in Franklin County, Virginia at Westlake; in Roanoke County at the intersection of Colonial Avenue and Virginia Route 419; in Roanoke City on Franklin Road in South Roanoke, in Salem on West Main Street. The Bank operated under the name NewRiver Bank, a branch of HomeTown Bank in the New River Valley market, on Market Street in Christiansburg until the end of the first quarter of 2016. In a step to provide better brand recognition, the Bank began using the name HomeTown Bank throughout all its branch locations.

The Company operates in a highly competitive market for commercial banking and financial services as the Roanoke Valley is a banking and financial services hub for much of southwest Virginia.

Discussion of Results of Operations

Overview of Results of Operations

Net income available to shareholders for 2017 was $2.5 million, $385 thousand greater than the prior year. The conversion of the remaining shares of preferred stock to common stock in June 2016 saved the company the $408 thousand in preferred stock dividends paid to preferred shareholders during the first half of 2016 compared to none paid in 2017.

Net income attributable to HomeTown Bankshares Corporation for 2017 totaled $2.5 million and was $23 thousand less than the prior year. Net interest income increased $1.5 million for 2017 compared to 2016 due mainly to the growth in average loans of 10.7%. Profitability was hampered in 2017 by the added costs of a core conversion and professional fees related to the temporary outsourcing of risk management. Income tax expense for 2017 included an adjustment to net deferred tax assets in the amount of $100 thousand of additional expense, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017. The Act reduced the corporate Federal tax rate from 34% to 21% effective January 1, 2018 and will benefit future years.

Basic earnings per common share was $0.43 for 2017, and $0.45 for 2016; compared to the diluted earnings per common share of $0.43 and $0.37 for 2017 and 2016, respectively. In June 2016, the remaining 13,600 shares of Series C preferred stock were converted into 2,176,000 of common shares. The preferred shareholders received an additional 87,037 shares as the result of the 4% stock dividend.  The conversion saved the Company the 6% dividend that had been paid annually to preferred shareholders. The dilutive nature of the preferred shares was factored into the diluted earnings per common share calculation before the conversion.

The following table is a schedule of the return on average assets and return on average equity for the dates indicated:

	For the years ended
	2017			2016			2015
Return on average assets		0.46	%		0.50	%		0.78	%
Return on average equity		5.02	%		5.31	%		7.94	%
Average equity to average assets		9.21	%		9.46	%		9.88	%

Summary of Financial Condition

Total assets of the Company were $550 million at December 31, 2017, compared to $517 million at the previous year end. The net loan portfolio increased $25.1 million or 6.0% from the end of 2016 to December 31, 2017, and contributed to a $33 million or 6.4% increase in total assets during the period. Residential real estate accounted for 39.8% of the total $25.1 million increase in gross loans. Total deposits increased 5.9% year over year and slightly surpassed the dollar increase in loans. From December 31, 2016 to December 31, 2017, cash increased $3.5 million or 19.1%.

Securities available for sale were $55.3 million and $53.0 million at the end of 2017 and 2016, respectively. The yields on securities available for purchase continued to be relatively low, and the Company continued to channel cash flow from lower rate investments in bonds to higher rate loans.

Bank owned life insurance (BOLI) increased $1.2 million during the year ended December 31, 2017 to $8.7 million at the end of the year. BOLI is the funding mechanism for the Supplemental Executive Retirement Plan (SERP) provided to executive management. The retirement of the Company’s former Chief Credit Officer and the hiring of an individual to succeed him resulted in the expansion of the number of individuals covered by the SERP. The benefit was funded by purchasing $1.0 million of additional BOLI. The liability for the SERP is included in other liabilities. The SERP is discussed in greater detail in Note 14 Salary Continuation Plan.

Total liabilities at December 31, 2017 were $499 million, compared to $469 million at the end of 2016, an increase of $30.3 million or 6.5%.  Growth in total deposits accounted for $26.5 million or 87.4% of the total increase in liabilities. Core deposits increased $24.0 million resulting in a decrease in reliance on wholesale funding and contributed to the 2 basis point improvement in the cost of funds.

11

Stockholders’ equity was $50.9 million at December 31, 2017, $2.7 million or 5.5% above the $48.2 million at the end of the previous year.  Net income available to common stockholders of $2.5 million raised the level of retained earnings to $3.8 million at December 31, 2017, compared to $1.2 million at December 31, 2016. Management believes the Company has sufficient capital to fund its operations while the Company strives to generate profits on a consistent basis, but there can be no assurance that this will be the case.

Non-performing Assets

Non-performing assets consist of nonaccrual loans, restructured loans, and repossessed and foreclosed assets. Following is a breakdown of non-performing assets:

	December 31,
(Dollars in thousands)	2017		2016		2015		2014		2013
Real Estate:
Construction and land development	$	274	$	—	$	11	$	—	$	—
Residential 1-4 families		173		577		—		475		707
Commercial real estate		209		336		368		758		—
Commercial loans		403		11		47		—		193
Equity lines		49		—		—		—		59
Loans to individuals		36		—		—		21		30
Total nonperforming loans		1,144		924		426		1,254		989
Other real estate owned		3,249		3,794		5,237		6,986		8,143
Total nonperforming assets, excluding performing restructured loans		4,393		4,718		5,663		8,240		9,132
Performing restructured loans		3,889		6,160		6,398		6,052		6,278
Total nonperforming assets, including restructured loans	$	8,282	$	10,878	$	12,061	$	14,292	$	15,410

The five year trend of non-performing assets reflects continued improvement in the economy from the economic crisis which began in 2008. Nonperforming assets, including restructured loans were 1.51% of total assets at the end of 2017, compared to 2.10% at the end of 2016 and 2.52% at the end of 2015.

Interest is accrued on outstanding loan principal balances, unless the Company considers collection to be doubtful. Commercial and consumer loans are designated as non-accrual when payment is delinquent 90 days or at the point which the Company considers collection doubtful, if earlier. When loans are placed in non-accrual status, interest previously accrued and unpaid interest is reversed against interest income in the current period and interest is subsequently recognized only to the extent cash is received and if principal repayment is probable. Interest accruals are resumed on such loans only when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Most non-accrual loans are classified as impaired. Impaired loans are evaluated periodically on an individual basis, and if appropriate, losses are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Total nonperforming assets, including restructured loans, declined $2.6 million from December 31, 2016 to December 31, 2017. The level of nonperforming loans at December 31, 2017 was $220 thousand higher than the level at December 31, 2016, while other real estate owned declined $545 thousand. A warehouse in Salem, which had been foreclosed on in April 2011 and had been subject to several write-downs, was sold in 2017 without any further loss. The warehouse was included in other real estate at $599 thousand at the end of 2016. The warehouse and other sales of other real estate reduced the total $1.0 million during the year, while one property valued at $1.0 million was added during 2017. Writedowns of other real estate owned totaled $588 thousand during the year. Performing restructured loans decreased $2.3 million year over year. One large loan with a balance of $2.2 million at December 31, 2016 was paid off by the borrower in early 2017.

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less anticipated selling cost. Valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell.

See also Note 5 of the Notes to Consolidated Financial Statements for information on changes in other real estate owned and for the major classifications of other real estate owned for 2017 compared to 2016.  

12

Net Interest Income and Net Interest Margin

The primary source of the Company’s revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, interest bearing bank accounts and certificates of deposit, and federal funds sold. Interest bearing liabilities include deposits and borrowings. The amount of net interest income is primarily dependent upon the volume and mix of these earning assets and interest bearing liabilities. Interest rate changes can also impact the amount of net interest income. Management develops pricing and marketing strategies to maximize net interest income while maintaining related assets and liabilities accounts within guideline policies as established by the Company’s Board of Directors.

The net interest margin represents net interest income divided by average earning assets. It reflects the average effective rate that the Company earned on its earning assets. The net interest margin is affected by changes in both interest rates and average volumes of interest earning assets and interest bearing liabilities.

For the year 2017, net interest income totaled $17.6 million; an increase of $1.4 million or 9.1% over the $16.2 million earned in the previous year. The expansion of earning assets, primarily loans, continued to be the driving force underlying increases in net interest income. For the year ended December 31, 2017, average earning assets totaled $506 million and were $44.3 million or 9.6% higher than the average of $462 million for 2016.  The increased volume of loans provided $1.8 million additional interest income in 2017 and was offset $538 thousand from lower yields. The average volume of the investment portfolio declined slightly but was offset by a higher tax equivalent yield. Increases in both balances and yields on deposits in banks added $120 thousand to interest income.

The net interest margin was 3.47% for the year 2017 compared to 3.55% for the previous year. This was primarily a result of a decline in loan yields. Loan yields declined 20 basis points to 4.33% during 2017. Increased liquidity in the markets fostered competition among commercial banks and other financial services industries to satisfy growing loan demand. Competition exerting downward pressure on rates in the market-place coupled with maturing seasoned loans at higher interest rates contributed to lower loan yields. Excess funds from increased liquidity were placed in interest bearing bank accounts until needed to fund further loan growth and the expansion of the investment portfolio. Total average deposits increased $38.9 million in 2017 compared to 2016. The change in the mix of deposits to a higher percentage of non-interest bearing demand deposits and the run off of more expensive time deposits contributed to the 2 basis point decrease in the cost of funds, partially negating lower loan yields. Management expects rates paid on deposits products will rise in 2018. The more volatile non-interest bearing deposits averaged $21.2 million more than last year.

The Federal Reserve develops monetary policy to attain its objectives of maximum employment and price stability. The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate 25 basis points three times in 2017-March 15, June 14 and December 13 to a target range of 1.25 to 1.50%. The Company expects the Federal Reserve to continue to raise rates in 2018.  

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The following table illustrates average balances of total interest-earning assets and total interest bearing liabilities for 2017, 2016 and 2015, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.

Average Balances, Interest Income and Expense, Yields and Rates

	2017								2016								2015
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate			Average Balance			Interest Income/ Expense		Yield/ Rate
Assets:
Federal funds sold	$	92		$	1		1.00	%	$	998		$	3		0.37	%	$	1,221		$	2		0.15	%
Deposits in banks		19,579			224		1.14			14,125			104		0.74			5,407			39		0.71
Securities, taxable		39,518			1,031		2.61			38,501			837		2.18			35,855			741		2.13
Securities, nontaxable (1)		11,535			308		4.05			14,574			388		4.03			14,673			405		4.12
Restricted equity securities		2,372			132		5.56			2,401			131		5.46			2,710			140		5.16
Loans held for sale		658			26		4.00			512			19		3.74			510			20		4.01
Loans (1)		432,337			18,947		4.33			390,672			17,692		4.53			350,805			16,354		4.66
Total earnings assets		506,091			20,669		4.07	%		461,783			19,174		4.20	%		411,181			17,701		4.36	%
Less: Allowance for loan losses		(3,705	)							(3,433	)							(3,319	)
Total non-earning assets		37,469								43,329								45,640
Total Assets	$	539,855							$	501,679							$	453,502
Liabilities and shareholders’ equity
Interest bearing deposits:
Checking	$	97,172		$	196		0.20	%	$	80,128		$	127		0.16	%	$	78,947		$	118		0.15	%
Money market savings		72,765			181		0.25			70,877			172		0.24			63,642			161		0.25
Regular savings		50,803			185		0.36			41,931			152		0.36			36,037			142		0.40
Time Deposits		139,792			1,720		1.23			149,969			1,765		1.18			139,282			1,477		1.06
Total interest bearing deposits		360,532			2,282		0.63			342,905			2,216		0.65			317,908			1,898		0.60
FHLB borrowings		11,755			197		1.65			14,176			237		1.65			25,208			371		1.45
Subordinated notes		7,238			537		7.41			7,208			536		7.44			281			19		6.89
Other borrowings		1,079			30		2.74			1,546			29		1.83			1,324			23		1.69
Total interest bearing liabilities		380,604			3,046		0.80			365,835			3,018		0.82			344,721			2,311		0.67
Non-interest bearing liabilities:
Demand deposits		107,072								85,846								61,975
Other liabilities		1,981								2,135								1,749
Total liabilities		489,657			3,046					453,816			3,018					408,445			2,311
Total HomeTown Bankshares Corporation stockholders’ equity		49,732			—					47,467			—					44,785			—
Noncontrolling interest in consolidated subsidiary		466								396								272
Total Stockholders’ equity		50,198			—					47,863			—					45,057			—
Total Liabilities and Stockholders’ Equity	$	539,855			3,046				$	501,679			3,018				$	453,502			2,311
Net interest income				$	17,623							$	16,156							$	15,390
Interest rate spread							3.27								3.38								3.69
Interest expense to average earning assets							0.60								0.65								0.57
Net interest margin							3.47	%							3.55	%							3.79	%

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

14

Rate and Volume Analysis

	2017 Compared to 2016									2016 Compared to 2015
	Increase			Change Due To:						Increase			Change Due To:
(Dollars in thousands)	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
Interest income:
Federal funds sold	$	(2	)	$	7		$	(9	)	$	1		$	1		$	—
Deposits in banks		120			58			62			65			1			64	)
Securities, taxable		194			84			110			96			38			58	)
Securities, nontaxable		(80	)		1			(81	)		(17	)		(14	)		(3
Restricted equity securities		1			3			(2	)		(9	)		8			(17
Loans held for sale		7			1			6			(1	)		(1	)		—
Loans		1,255			(538	)		1,793			1,338			(391	)		1,729
Total interest income		1,495			(384	)		1,879			1,473			(358	)		1,831
Interest expense:
Interest bearing liabilities:
Checking		69			35			34			9			7			2
Money market savings		9			5			4			11			(6	)		17
Regular savings		33			1			32			10			(14	)		24
Time Deposits		(45	)		69			(114	)		288			122			166
FHLB borrowings		(40	)		—			(40	)		(134	)		46			(180
Subordinated notes		1			(2	)		3			517			2			515
Other borrowings		1			2			(1	)		6			2			4
Total interest expense		28			110			(82	)		707			159			548
Net interest income	$	1,467		$	(494	)	$	1,961		$	766		$	(517	)	$	1,283

Noninterest Income

Noninterest income includes service charges on deposit accounts, ATM and interchange income, brokerage fees on non-portfolio mortgage loans, and net gains on securities sales. Noninterest income increased $182 thousand or 5.9% for the year 2017 compared to the prior year.  Excluding gains on sales of investment securities, core noninterest revenue for 2017 was $370 greater than the prior year. ATM and interchange income for 2017 was $167 thousand or 24.9% more than the year 2016 due to the expansion of the customer base and the full implementation of the in-house credit card program in the fourth quarter of 2016. Revenue from mortgage banking was $105 thousand or 12.3% more than the prior year and correlated with improvements in the economy. The Roanoke Valley Association of Realtors reported a 5.5% increase in the number of residential units sold in 2017 over 2016 and a 6.3% increase in the average home price. Merchant processing and investment brokerage saw substantial income increases due to the expansion of these lines of business. A one-time bankruptcy settlement of $172 thousand was included in 2017 other income and contributed to the increase.

Noninterest Income

	Period Ended December 31,
(Dollars in thousands)	2017		2016		$ Change			% Change
Service charges on deposit accounts	$	544	$	669	$	(125	)		(18.7	)%
ATM and interchange income		837		670		167			24.9
Mortgage banking income		959		854		105			12.3
Net gains on sales of investment securities		69		257		(188	)		(73.2	)
Investment brokerage income		162		65		97			149.2
Increase in cash surrender value of bank owned life insurance		200		184		16			8.7
Merchant processing income		137		110		27			24.5
Other income		375		292		83			28.4
Total noninterest income	$	3,283	$	3,101	$	182			5.9	%

15

Noninterest Expense

Non-interest expense includes, among other things, salaries and benefits, occupancy costs, data processing, advertising and marketing, and professional fees.  Total noninterest expense increased $1.8 million or 12.8%, to $16.0 million for 2017.  The Company’s management and staff monitor and control operating expenses to provide adequate operational support and enable growth opportunities.

Salaries and employee benefits for 2017 were $8.1 million compared to $7.0 million for the prior year. The $1.1 million or 16.0% increase was due to several factors. The increase was due to several factors including the implementation of an in-house credit card program and additional operations personnel to support the continued loan and deposit growth. Unfilled open positions in the prior year, and new positions to accommodate growth, as well as annual merit raises contributed to the increase. The numbers of full time equivalent employees were 107 and 99 at December 31, 2017 and 2016, respectively. Also contributing to the increase was the deferral of less loan origination costs, in accordance with ASC 310-20.Another factor contributing to higher salaries and employee benefits expense was the partial reversal of incentive bonus accruals in 2016 that were fully accrued in 2017.

Occupancy and equipment expense totaled $1.7 million for the year ended December 31, 2017, unchanged from the prior year.

Discretionary spending on advertising and marketing increased by $57 thousand or 11.9% from the prior year.

Professional fees increased by $94 thousand or 19.0% in 2017 compared to 2016. As the result of an internal promotion, the position of Senior Risk Officer became open in August 2016 and remained unfilled through March 30, 2017. Additional professional fees were incurred from the engagement of an external consulting firm in the last quarter of 2016 to complete the 2016 internal audit plan. Their work was completed by mid-year 2017.

Data processing expense for 2017 was $185 thousand or 16.4% higher than 2016. The increase reflected additional processing costs incurred from the expansion of the core deposit customer base and the transition to a new core system during the year.

Bank Franchise Tax was $33 thousand or 9.0% higher for 2017 than for 2016. The increase in the Bank’s equity from retained earnings, and the reduction in real estate taxes paid on foreclosed properties, which are deducted from capital on the Bank Franchise return, were all factors contributing to the increase in the Bank Franchise Tax in 2017.

Losses on sales and writedowns of other real estate were $86 thousand higher in 2017 than 2016. During 2017, a property acquired in 2011 for $1.2 million, and carried at $599 thousand at December 31, 2016, was written down an additional $380 and sold for a $7 thousand gain before year end December 31, 2017. The prior year 2016 included another property on the books for $1.3 million that was sold for a loss of $91 thousand after being held by the bank for almost two years. The year 2017 included additional writedowns totaling $208 thousand. December 2016 included $405 thousand of writedowns on two foreclosed properties, one of which was sold in January 2017 with no further loss.

Other expenses were $1.7 million in 2017 compared to $1.4 million in 2016. Other expense includes compliance costs, office supplies and printing costs, and a number of other fees and expenses. More than a third of the $308 thousand increase was due to one-time costs incurred directly related to the core system conversion.

Non-Interest Expense

	Period Ended December 31,
(Dollars in thousands)	2017		2016		$ Change			% Change
Salaries and employee benefits	$	8,098	$	6,981	$	1,117			16.0	%
Occupancy and equipment expense		1,650		1,650		-			-
Advertising and marketing expense		537		480		57			11.9
Professional fees		588		494		94			19.0
Data processing expense		1,314		1,129		185			16.4
Bank franchise taxes		399		366		33			9.0
FDIC insurance expense		248		306		(58	)		(19.0	)
Losses on sales and writedowns of other real estate		581		495		86			17.4
Other real estate owned expense		106		97		9			9.3
Directors’ fees		410		411		(1	)		(0.2	)
Communications expense		176		162		14			8.6
ATM maintenance expense		197		228		(31	)		(13.6	)
Other expense		1,663		1,355		308			22.7
Total non-interest expense	$	15,967	$	14,154	$	1,813			12.8	%

16

Income Tax Expense

Income tax expense was $1.2 million and $1.4 million for the years ended December 31, 2017 and 2016, respectively. The decrease was due to lower pre-tax earnings and the tax impact of expired incentive stock options in 2016, partially offset by adjustment to deferred tax assets. The Company incurred additional tax expense of $236 thousand in 2016 due to the expiration of stock options in the second quarter that were issued in 2006 and were never exercised. This charge was due to the reversal of tax benefits recorded previously that could not be realized due to the expiring options. The Tax Cuts and Jobs Act was signed into law on December 22, 2017, which required the Company's deferred tax assets and liabilities to be adjusted at that date, for the effect of the change in the corporate tax rate. This adjustment resulted in a net increase to federal income tax expense of $100 thousand during 2017. See Note 16 Income Taxes for a breakdown of current and deferred taxes and detail of the net deferred taxes at the end of both years.  

Loans

Our primary source of income is our lending activities. The following table presents the composition of the Company’s loan portfolio at the dates indicated:

Loan Portfolio

	December 31,
(Dollars In Thousands)	2017		2016		2015		2014		2013
Construction:
Residential	$	15,221	$	10,204	$	11,779	$	10,019	$	6,768
Land acquisition, development & commercial		35,601		27,480		27,440		23,686		20,904
Real Estate:
Residential		121,649		111,626		100,268		86,269		72,934
Commercial		173,999		172,248		140,952		135,070		126,100
Commercial, industrial & agricultural		61,197		59,809		53,012		44,807		42,155
Equity lines		28,835		29,956		26,376		24,330		20,374
Consumer		7,693		7,668		7,531		7,498		8,698
Total loans	$	444,195	$	418,991	$	367,358	$	331,679	$	297,933

As with most community banks, the loan portfolio is concentrated in commercial real estate loans, and comprised 39.2% and 41.1% of the total loan portfolio at December 31, 2017 and 2016, respectively. At December 31, 2017, there were no industry concentrations with outstanding balances representing 10% or more of total loans.

Maturities of Loans at December 31, 2017 are as follows:

(Dollars in Thousands)	Fixed Rate		Adjustable Rate		Total
Construction loans Maturing:
Within one year	$	12,587	$	6,824	$	19,411
One to five years		10,586		9,068		19,654
After five years		6,074		5,683		11,757
Total	$	29,247	$	21,575	$	50,822

(Dollars in Thousands)	Fixed Rate		Adjustable Rate		Total
Commercial loans Maturing:
Within one year	$	9,910	$	13,327	$	23,237
One to five years		20,044		13,458		33,502
After five years		3,371		1,087		4,458
Total	$	33,325	$	27,872	$	61,197

Provision and Allowance for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level to cover known and inherent risk of loss in the loan portfolio. Higher net charge offs during 2017 and loan growth resulted in a provision for loan losses for the year of $1.1 million compared to slightly less in the previous year.

Net charge offs for 2017 totaled $1.0 million, and included a partial charge off of $150 thousand for one loan. The loan had been current at the end of the quarter prior to the charge off. The remaining balance of $180 thousand is included in nonaccrual loans and is in the process of foreclosure. For 2016, net charge offs were $744 thousand.

17

The allowance consists of three components: specific, general, and unallocated reserves. 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. The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries.

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.  Potentially impaired loans may include current “watch list” credits that are rated special mention, substandard, or doubtful with a total combined credit relationship in excess of $100 thousand. Management individually reviews these potentially impaired loans based on generally accepted accounting standards related to receivables and makes a determination if the loan is in fact 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 sell, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. The factors considered in recognizing a loan as impaired are detailed in Note 1 Significant Accounting Policies. Impaired loans totaled $5.3 million on December 31, 2017, a decrease of $2.0 million from the same period in 2016. One of the impaired credits with a balance of $2.2 million on December 31, 2016 paid off early in January 2017 and another with a balance of $577 thousand paid off during the second quarter 2017. Three loan relationships totaling $1.0 million were added to impaired loans in 2017. One relationship totaling $115 thousand was upgraded and returned to accruing status in 2017. The remaining change in the balance year over year was due to payments. The were no specific reserves related to impaired loans at year end 2017 and $17 thousand at year end 2016 related to the aforementioned loan that was upgraded.

The credit quality of the remaining portfolio remained strong, and was evaluated collectively to ensure the adequacy of the general reserves for loan losses. The general component of the reserve covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The adequacy of general reserves is determined by dividing the remaining loan portfolio into 30 homogenous pools, each with its unique degree of inherent risk and applying a loss factor to each pool of loans.  In determining the loss factor for each pool of homogenous loans the following factors are considered: net charge-offs, underlying collateral, lending policies and underwriting practices, economic conditions, management experience, quality of loan review and oversight, effects of external competition and regulation, loan pool concentrations, loan pool volume, past due and non-accrual loans and classified loans. From December 31, 2016 to December 31, 2017, the general component, including the unallocated component, increased $139 thousand. For the same period of time, the loans collectively evaluated rose $27 million to $439 million at the end of 2017.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. It also reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. On a quarterly basis, management performs a detailed analysis of the allowance for loan losses to verify the adequacy and appropriateness of the allowance in meeting probable losses in the loan portfolio. The unallocated component was $9 thousand and $122 thousand at December 31, 2017 and 2016, respectively. See Note 4 for a more detailed breakdown of the allowance for loan losses.

The Company's total reserves amounted to $3.8 million or 0.85% of total loans at December 31, 2017, compared to $3.6 million or 0.87% of total loans at December 31, 2016 and reflects the credit quality of the underlying loan portfolio. Despite an increase in nonperforming loans, the level of total non-performing assets steadily declined as the economy improved. The “Loans by Credit Quality Indicators” tables in Note 4 Allowance for Loan Losses reveal a $669 thousand increase in “Substandard Accruing” loans to $2.0 million at December 31, 2017, and a $12.9 million increase in “Special Mention” loans to $13.0 million. $10.7 million of the $13.0 million represents 14 loans to 12 different related entities. The entities entered into a Consent Judgement that requires them to distribute back pay and liquidated damages to the U.S. Department of Labor (DOL) to be distributed to the affected employees through September 30, 2019. Overall, the affected entities still cash flow and are well collateralized. Pass loans as a percent of total loans decreased from 99.4% at December 31, 2016 to 96.4% at December 31, 2017. Past due and accruing loans increased from 0.29% of total loans at December 31, 2016 to 0.67% at December 31, 2017.

Management considers economic information in determining the adequacy of the allowance for loan losses. The most recent economic activity report dated March 7, 2018 from the Federal Reserve (the Beige Book) indicated that the economy expanded at a modest to moderate pace across the 12 Federal Reserve Districts in January and February 2018. The local markets are largely shielded from national events and trends, but do tend to realize lagging effects in subsequent quarters. The Federal Reserve Bank of Richmond’s February 2018 Snapshot reported payroll employment expanded to 159,000, an increase of 0.44% for the Roanoke MSA, while Blacksburg’s MSA expanded to 92,000, an increase of 1.20% from the end of 2016 to the end of 2017. Management decreased the qualitative factors 5 basis points for national and local economic conditions in 2017. Should the economy change, the Bank will look to adjust the factors in future quarter analysis.

18

The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated.

Allowance for Loan Losses

(Dollars In Thousands)	2017			2016			2015			2014			2013
Balance, beginning	$	3,636		$	3,298		$	3,332		$	3,721		$	3,790
Provision charged to operating expense		1,142			1,082			−			−			125
Recoveries of amounts charged off		58			104			46			75			381
Loans charged off		(1,078	)		(848	)		(80	)		(464	)		(575	)
Balance, ending	$	3,758		$	3,636		$	3,298		$	3,332		$	3,721
Ratio of net charge-offs to average loans		0.23	%		0.19	%		0.01	%		0.12	%		0.07	%

The following table presents the allocation of the Allowance for Loan Losses for the periods indicated. The Allowance for Loan Losses is allocated in the manner prescribed by ASU 2010-20 (Refer to Note 1 of Consolidated Financial Statements). Some unallocated reserves are desirable given the degree of estimation involved in the nature of the analysis of the adequacy of the allowance for loan losses.

December 31,
(Dollars in thousands)	2017					2016					2015					2014					2013
	Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans
Construction:
Residential	$	94		3.4	%	$	63		3.2	%	$	83		3.0	%	$	43		2.3	%	$	156		1.8	%
Land acquisition, development & commercial		311		8.0			173		7.4			187		7.2			453		7.0			872		7.4
Real Estate:
Residential		955		27.4			866		27.3			1,047		26.0			833		24.5			867		25.3
Commercial		1,603		39.2			1,516		38.4			1,001		40.7			1,012		42.3			1,008		39.8
Commercial, industrial & agricultural		441		13.8			461		14.4			531		13.5			319		14.2			327		15.4
Equity lines		237		6.5			338		7.2			277		7.3			423		6.8			385		7.5
Consumer		108		1.7			97		2.1			85		2.3			65		2.9			63		2.8
Unallocated		9		—			122		—			87		—			184		—			43		—
Total allowance for loan losses	$	3,758		100.0	%	$	3,636		100.0	%	$	3,298		100.0	%	$	3,332		100.0	%	$	3,721		100.0	%

Investment Portfolio

At December 31, 2017, 2016 and 2015 all of the Company’s securities were classified as available-for-sale. The composition of the investment portfolio for the years ending December 31, 2017 and 2016 appear in Note 2 of this report. The following table presents the composition of the investment portfolio as of December 31, 2015.

(Dollars In Thousands)	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government agency securities	$	16,899	$	227	$	(107	)	$	17,019
Mortgage-backed securities and CMO’s		18,289		75		(174	)		18,190
Municipal securities		16,756		594		(15	)		17,335
	$	51,944	$	896	$	(296	)	$	52,544

19

The Company began recording income tax expense in 2012, based on an assessment of the Company’s profitable operations over the preceding quarters and projections of future taxable income. Able to now realize the associated tax benefit from investing in non-taxable municipal securities, the Company has restructured the portfolio to take advantage of this favorable income tax treatment.

Securities Available for Sale, Maturity Distribution and Average Yields

	December 31, 2017
(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
U.S. government agency securities:
Maturing within 1 year	$	-	$	-		-	%
Maturing after 1 year and within 5 years		2,022		2,010		2.39
Maturing after 5 years and within 10 years		3,591		3,584		2.70
Maturing after 10 years		7,862		7,841		2.64
Mortgage backed securities and CMO’s:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		484		479		1.83
Maturing after 5 years and within 10 years		2,900		2,858		2.23
Maturing after 10 years		20,960		20,644		2.45
Corporate securities:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		−		−		−
Maturing after 5 years and within 10 years		6,991		7,067		4.69
Maturing after 10 years		−		−		−
Taxable municipal securities:
Maturing within 1 year		−		−		−
Maturing after 1 year and within 5 years		457		454		1.70
Maturing after 5 years and within 10 years		777		821		5.31
Maturing after 10 years		-		-		-
Nontaxable municipal securities:
Maturing within 1 year		245		245		−
Maturing after 1 year and within 5 years		-		-		1.45
Maturing after 5 years and within 10 years		1,465		1,481		2.73
Maturing after 10 years		7,769		7,860		3.55
Total Maturities	$	55,523	$	55,344		3.04	%

The weighted average yield for nontaxable municipal securities is reported on a tax equivalent basis.

Deposits

The Company’s primary source of funds is deposit accounts. The Company’s deposit base is comprised of demand deposits, savings and money market accounts, and time deposits. The Company’s deposits are provided primarily by individuals and businesses located in the Company’s market area. The Company is a member of the Promontory Financial Network and uses its CDARS and ICS programs to provide FDIC deposit insurance coverage for certificates of deposit or demand deposits in excess of $250 thousand, when requested by customers.  

Total deposits increased by $26.5 million or 5.9% from $450.8 million at December 31, 2016 to $477.3 million at December 31, 2017. The Company’s ability to attract and retain deposits, and our cost of funds, has been, and will continue to be significantly affected by market conditions. Core deposits increased by $24 million or 5.8% from $412.5 million at December 31, 2016 to $436.5 million at December 31, 2017. The $24 million increase was achieved while $9 million in higher costing retail CDs from CD only customers were not renewed. An additional $15.4 million in non-core brokered/wholesale funding was paid down during 2017.

20

The following table is a schedule of average balances and average rates paid for each deposit category for the periods presented:

	Average Deposits and Rates Paid December 31,
	2017					2016					2015
(Dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate
Non-interest bearing deposits	$	107,072		−	%	$	85,846		−	%	$	61,975		−	%
Interest bearing accounts:
Checking		97,172		0.20			80,128		0.16			78,947		0.15
Money market savings		72,765		0.25			70,877		0.24			63,642		0.25
Regular savings		50,803		0.36			41,931		0.36			36,037		0.40
Time Deposits		139,792		1.23			149,969		1.18			139,282		1.06
Total Interest Bearing		360,532		0.63	%		342,905		0.65	%		317,908		0.60	%
Total	$	467,604				$	428,751				$	379,883

The following table is a schedule of maturities for time deposits of $100,000 or more at the dates indicated:

Maturities of Certificates of Deposits with Balances of $100,000 or More

(Dollars in thousands)	Within 3 months		3 to 6 months		6 to 12 months		Over 1 year		Total		Percent of Total Deposits
At December 31, 2017	$	9,431	$	11,952	$	24,690	$	32,810	$	78,883		16.53	%

 Liquidity and Interest Rate Sensitivity

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

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

The Company’s asset based liquidity position, cash and due from bank balances, federal funds sold, loans held for sale, securities available for sale, net of securities pledged and cash balance requirements totaled $70.0 million at December 31, 2017, compared to $59.2 million at December 31, 2016. To provide a more stable source of liquidity, at the end of the fourth quarter 2015, the Company issued $7.5 million in subordinated notes. Liquidity trended downward during 2016 as the funds from the debt issuance were invested in earning assets, reduced debt and reliance on brokered deposits, and were utilized in other ways to contribute to overall profitability. Liquidity returned to more normalized levels throughout 2017.

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. If deposits are not an attractive source for funding, either for reasons of maturity or pricing, alternative sources include FHLB advances, brokered deposits, fed funds purchased and lines of credit. The Company is approved to borrow 25% of our total assets from the FHLB subject to providing qualifying collateral.  At December 31, 2017, the Company had borrowed $11.0 million of the $21.5 million of lendable collateral value, leaving $10.5 million of unused credit immediately available. The Company also had $36.5 million of fed funds lines of credit available at the end of 2017. In addition, the Company had access to a $10.0 million credit line through Promontory’s Insured Cash Sweep (ICS) one way buy program at a rate of the one month LIBOR plus 11 basis points but not less than 20 basis points. At December 31, 2017, there were no advances on the fed funds or credit lines.

A financial institution can be exposed to several market risks that may impact its value or future earnings capacity. These risks include interest rate risk, foreign currency exchange risk, commodity price risk and equity market price risk. The Company’s primary market risk is interest rate risk. Interest rate risk is inherent, because as a financial institution, a significant amount of operating revenue is derived from customer deposits and possible borrowings at various terms and rates. These funds are then invested into earning assets (loans and investments) at various terms and rates.

21

Interest rate risk is the exposure to fluctuations in future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specific time period as a result of scheduled maturities and repayment and contractual interest rate changes.

Interest rate sensitivity at December 31, 2017 is summarized in the table below

	Interest Rate Sensitivity
Rate Shock	Net Interest Income (NII)		NII Change from Level
+400	$	19,355		5.95	%
+300		19,092		4.51	%
+200		18,791		2.86	%
+100		18,506		1.30	%
Level		18,268
-100		18,231		-0.20	%
-200		18,111		-0.86	%
-300		17,923		-1.89	%

The shifts in net interest income due to rate shocks are all within our policy limits. Recent growth in both the loan and investment portfolios has been in fixed rate products decreasing the impact of interest rate shocks on net interest income. Net interest income continues to increase with increases in interest rates.

The primary objective of our asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. The goal is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

Management strives to control the exposure to interest rate volatility and operates under policies and guidelines established by the Board of Directors, who set the level of acceptable risk, by understanding, reviewing and making decisions based on the Company’s risk position. In addition, pricing, promotion and product development activities are assessed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest risk objectives. A variety of analytical systems and balance sheet tools are used to manage interest rate risk.

Interest Rate Sensitivity

(Dollars in thousands)	0 - 3 Months			3 - 12 Months			1 - 5 Years			Over 5 Years			Total
Interest Earning Assets
Securities	$	5,975		$	3,632		$	28,096		$	20,191		$	57,894
Interest-bearing deposits in other banks		12,583			—			—			—			12,583
Loans		118,841			58,886			215,918			50,550			444,195
Loans held for sale		1,587			—			—			—			1,587
Federal funds sold		180			—			—			—			180
Total	$	139,166		$	62,518		$	244,014		$	70,741		$	516,439
Cumulative totals	$	139,166		$	201,684		$	445,698		$	516,439
Interest Bearing Liabilities
Interest checking	$	114,698		$	—		$	—		$	—		$	114,698
Savings		54,534			—			—			—			54,534
Money market		69,673			—			—			—			69,673
Time deposits		18,730			55,378			57,351			—			131,459
FHLB borrowings		4,323			4,975			1,730			—			11,028
Subordinated notes		—			—			7,254			—			7,254
Other borrowings		1,558			—			—			—			1,558
Total		263,516			60,353			66,335			—			390,198
Cumulative totals		263,516			323,863			390,198			390,198
Interest sensitivity gap	$	(124,350	)	$	2,165		$	177,679		$	70,741		$	126,235
Cumulative interest sensitivity gap	$	(124,350	)	$	(122,185	)	$	55,494		$	126,235
Cumulative interest sensitivity gap to total interest earning assets		(24.08	%)		(23.66	%)		10.76	%		24.44	%

22

Capital Resources

To enable future growth of the Company, there must be an adequate level of capital. Management reviews the Company’s capital to ensure that the amount, composition and quality of the Company’s assets and liabilities satisfy regulatory requirements, meet or exceed industry standards, and support projected Company growth. The Company’s stock is traded on the NASDAQ Capital Market under the symbol “HMTA.”

At December 31, 2017 and December 31, 2016, the Company had stockholders’ equity of $50.9 million and $48.2 million, respectively, an increase of $2.7 million or 5.6%. The remaining preferred shares were converted to common stock in June, 2016 eliminating the dividend of 6% per year in future quarters. Each share of Series C preferred stock converted into 166.4 shares of common stock, which was comprised of the conversion factor of 160 plus the benefit of the 4% stock dividend of 6.4 additional shares.  The total number of share added from the conversion, including the benefit of the stock dividend was 2,263,037.

The 4% common stock dividend declared by the Board of Directors on May 10, 2016 to common shareholders of record June 9, 2016 was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177 to a total of 5,763,944 on July 11, 2016. The stock dividend shifted $1.3 million from retained earnings to common stock and surplus. The ability to pay dividends to common stockholders is limited by regulatory restrictions and the need to maintain sufficient capital in the Company and in our subsidiaries. No cash dividends were paid to common stockholders in 2017 or 2016. The Company must consider different factors to ensure that any future dividends to common stockholders would be prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. The Company had $3.8 million in retained earnings at the end of 2017.

The Basel III capital framework represented the most comprehensive overhaul of the U.S. banking capital framework in over two decades. This new capital framework and related changes to the standardized calculations of risk-weighted assets were complex and created additional compliance burdens. Basel III rules became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule. The Basel III Capital Rules have required significantly more capital and adopted more demanding regulatory capital risk weightings and calculations. As a result of the Basel III Capital Rules, many community banks may be forced to limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Company believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final Rules. However, increased capital requirements imposed by the Basel III Capital Rules may require the Company to limit its banking operations, retain net income to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations. See Note 18 for additional discussion of capital requirements.

The Company met the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The table presents the Bank’s capital amounts and ratios calculated using the Basel III rules in effect at December 31, 2017, and December 31, 2016.

Risk Based Capital Analysis

Capital Analysis

HomeTown Bank	December 31,
(Dollars in thousands)	2017			2016
Common Equity Tier 1 Capital:
Common Stock	$	14,697		$	14,697
Surplus		32,226			32,078
Retained Earnings		10,551			8,008
Common Equity Tier 1 Capital		57,474			54,783
Tier 1 Capital:
Tier 1 Minority Interest		25			17
Tier 1 Capital		57,499			54,800
Total Capital:
Allowance for Loan Losses (allowable portion)		3,758			3,636
Total Capital	$	61,257		$	58,436
Capital Ratios:
Total Capital to Risk-Weighted Assets		12.48	%		12.59	%
Tier 1 Common Equity to Risk-Weighted Assets		11.71	%		11.80	%
Tier 1 Capital to Risk-Weighted Assets		11.72	%		11.80	%
Tier 1 Capital to Average Assets		10.39	%		10.67	%

23

Financial Instruments with off Balance Sheet Risk and Contractual Obligations and Other Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Note 17 provides additional detail regarding commitments at the end of 2017 and 2016. 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 violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as a part of this report:

Financial Statements

Consolidated Balance Sheets, December 31, 2017 and 2016

Consolidated Statements of Income, Years Ended December 31, 2017 and 2016

Consolidated Statements of Comprehensive Income, Years Ended December 31, 2017 and 2016

Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2017 and 2016

Consolidated Statements of Cash Flows, Years Ended December 31, 2017 and 2016

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

24

HomeTown Bankshares Corporation

Consolidated Balance Sheets

December 31, 2017 and 2016

Dollars in Thousands, Except Share and Per Share Data	December 31, 2017			December 31, 2016
Assets
Cash and due from banks	$	21,714		$	18,229
Federal funds sold		180			42
Securities available for sale, at fair value		55,344			52,975
Restricted equity securities, at cost		2,371			2,213
Loans held for sale		1,587			678
Loans, net of allowance for loan losses of $3,758 in 2017 and $3,636 in 2016		440,437			415,355
Property and equipment, net		12,937			13,371
Other real estate owned, net of valuation allowance of $797 in 2017 and $825 in 2016		3,249			3,794
Bank owned life insurance		8,669			7,469
Accrued income		2,681			2,289
Other assets		1,084			875
Total assets	$	550,253		$	517,290
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	106,956		$	91,354
Interest-bearing		370,364			359,494
Total deposits		477,320			450,848
Federal Home Loan Bank borrowings		11,028			8,000
Subordinated notes		7,254			7,224
Other borrowings		1,558			1,117
Accrued interest payable		368			386
Other liabilities		1,833			1,490
Total liabilities		499,361			469,065
Commitments and contingencies		–			–
Stockholders’ equity:
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 5,775,597 (includes 32,087 restricted shares) at December 31, 2017 and 5,760,735 (includes 31,546 restricted shares) at December 31, 2016		28,777			28,765
Surplus		17,980			17,833
Retained earnings		3,767			1,247
Accumulated other comprehensive loss		(141	)		(56	)
Total HomeTown Bankshares Corporation stockholders’ equity		50,383			47,789
Noncontrolling interest in consolidated subsidiary		509			436
Total stockholders’ equity		50,892			48,225
Total liabilities and stockholders’ equity	$	550,253		$	517,290

See Notes to Consolidated Financial Statements

25

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the years ended December 31, 2017 and 2016

Dollars in Thousands, Except Share and Per Share Data	2017		2016
Interest and dividend income:
Loans and fees on loans	$	18,973	$	17,711
Taxable investment securities		1,031		837
Nontaxable investment securities		308		388
Dividends on restricted stock		132		131
Other interest income		225		107
Total interest and dividend income		20,669		19,174
Interest expense:
Deposits		2,282		2,216
Subordinated notes		537		536
Other borrowed funds		227		266
Total interest expense		3,046		3,018
Net interest income		17,623		16,156
Provision for loan losses		1,142		1,082
Net interest income after provision for loan losses		16,481		15,074
Noninterest income:
Service charges on deposit accounts		544		669
ATM and interchange income		837		670
Mortgage banking		959		854
Gains on sales of investment securities, net		69		257
Other income		874		651
Total noninterest income		3,283		3,101
Noninterest expense:
Salaries and employee benefits		8,098		6,981
Occupancy and equipment expense		1,650		1,650
Data processing expense		1,314		1,129
ATM maintenance expense		197		228
Advertising and marketing expense		537		480
Professional fees		588		494
Bank franchise taxes		399		366
FDIC insurance expense		248		306
Losses on sales and writedowns of other real estate owned, net		581		495
Other real estate owned expense		106		97
Directors’ fees		410		411
Other expense		1,839		1,517
Total noninterest expense		15,967		14,154
Net income before income taxes		3,797		4,021
Income tax expense		1,228		1,440
Net income		2,569		2,581
Less net income attributable to non-controlling interest		73		62
Net income attributable to HomeTown Bankshares Corporation		2,496		2,519
Effective dividends on preferred stock		–		408
Net income available to common stockholders	$	2,496	$	2,111
Basic earnings per common share	$	0.43	$	0.45
Diluted earnings per common share	$	0.43	$	0.37
Weighted average common shares outstanding		5,769,752		4,652,853
Diluted weighted average common shares outstanding		5,804,382		5,776,292

See Notes to Consolidated Financial Statements

26

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2017 and 2016

Dollars in Thousands	2017			2016
Net income	$	2,569		$	2,581
Other comprehensive loss:
Net unrealized holding losses on securities available for sale during the period		(25	)		(428	)
Deferred income tax benefit on unrealized holding losses on securities available for sale		9			146
Reclassification adjustment for gains on sales of investment securities included in net income		(69	)		(257	)
Tax expense related to realized gains on securities sold		24			87
Total other comprehensive loss		(61	)		(452	)
Comprehensive income		2,508			2,129
Less: comprehensive income attributable to the non-controlling interest		73			62
Comprehensive income attributable to HomeTown Bankshares Corporation	$	2,435		$	2,067

See Notes to Consolidated Financial Statements

27

HomeTown Bankshares Corporation

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended December 31, 2017 and 2016

Dollars in Thousands, Except Share

	Preferred Stock Series C			Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest		Total
Balance, December 31, 2015	$	12,893		$	16,801		$	15,484		$	443		$	396		$	374	$	46,391
Net income											2,519						62		2,581
Other comprehensive loss, net of tax														(452	)				(452	)
Net settlement of restricted stock vesting (8,519 shares, net)					(16	)		(13	)										(29	)
Preferred stock dividend paid											(408	)							(408	)
Common stock dividend issued					665			637			(1,307	)							(5	)
Conversion of preferred stock to common stock		(12,893	)		11,315			1,578											–
Stock based compensation								147											147
Balance, December 31, 2016		–			28,765			17,833			1,247			(56	)		436		48,225
Net income											2,496						73		2,569
Other comprehensive loss, net of tax														(61	)				(61	)
Net settlement of restricted stock vesting (9,821 shares, net)					(10	)		(10	)										(20	)
Exercise of stock options (4,500 shares)					22			9											31
Reclassification of stranded tax effects from change in tax rate											24			(24	)				–
Stock based compensation								148											148
Balance, December 31, 2017	$	–		$	28,777		$	17,980		$	3,767		$	(141	)	$	509	$	50,892

See Notes to Consolidated Financial Statements

28

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the years ended December 31, 2017 and 2016

Dollars in Thousands	2017			2016
Cash flows from operating activities:
Net income	$	2,569		$	2,581
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		726			754
Provision for loan losses		1,142			1,082
Amortization of premium on securities, net		465			591
Amortization of discount on subordinated notes		30			30
Gains on sales of loans held for sale		(690	)		(626	)
Losses on sales and writedowns of other real estate, net		581			495
Gains on sales of investment securities		(69	)		(257	)
Net losses on fixed assets disposals		-			13
Increase in value of life insurance contracts		(200	)		(184	)
Stock compensation expense		148			147
Originations of loans held for sale		(33,611	)		(25,897	)
Proceeds from sales of loans held for sale		33,392			27,488
Changes in assets and liabilities:
Accrued income		(392	)		(232	)
Other assets		(53	)		96
Deferred taxes, net		(123	)		(56	)
Accrued interest payable		(18	)		14
Other liabilities		343			229
Net cash flows provided by operating activities		4,240			6,268
Cash flows from investing activities:
Net (increase) decrease in federal funds sold		(138	)		1,287
Purchases of available for sale securities		(23,403	)		(15,829	)
Sales, maturities, and calls of available for sale securities		20,544			14,379
Redemptions (purchase) of restricted equity securities, net		(158	)		322
Net increase in loans		(27,248	)		(52,858	)
Proceeds from sales of other real estate		988			1,429
Purchases of bank owned life insurance		(1,000	)		(1,000	)
Purchases of property and equipment		(292	)		(130	)
Net cash flows used in investing activities		(30,707	)		(52,400	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		15,602			14,086
Net increase in interest-bearing deposits		10,870			37,216
Net increase (decrease) in FHLB borrowings		3,028			(14,000	)
Net increase (decrease) in other borrowings		441			(1,244	)
Exercise of stock options		31			–
Preferred stock dividend payment		–			(408	)
Net settlement of vested restricted stock and cash in lieu of fractional shares		(20	)		(34	)
Net cash flows provided by financing activities		29,952			35,616
Net increase (decrease) in cash and cash equivalents		3,485			(10,516	)
Cash and cash equivalents, beginning		18,229			28,745
Cash and cash equivalents, ending	$	21,714		$	18,229
Supplemental disclosure of cash flow information:
Cash payments for interest	$	3,064		$	2,974
Cash payments for income taxes	$	1,461		$	1,368
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans to other real estate owned	$	1,024		$	481
Change in unrealized gains and losses on available for sale securities	$	(94	)	$	(685	)
Conversion of preferred stock to common stock	$	–		$	12,893

See Notes to Consolidated Financial Statements

29

HomeTown Bankshares Corporation

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.

In 2013 the Bank formed a joint venture with another entity and now has a 49% ownership interest in HomeTown Residential Mortgage, LLC. 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 Residential Mortgage LLC 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 a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Summary of Significant Accounting Policies

The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of HomeTown Bankshares Corporation and its wholly-owned subsidiary HomeTown Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the valuation of deferred tax assets. Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate (as applicable) is susceptible to changes in local market conditions.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and amounts due from correspondent banks. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated balance sheet caption “cash and due from banks.”

Securities

Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently, all of the Company’s investment securities are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

30

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Restricted Equity Securities

As members of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB), the Bank is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.

Loans Held for Sale

Secondary market mortgage loans are designated as held for sale at the time of their origination.  These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold.  These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government sponsored enterprises (conforming loans).  In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk.  Loans held for sale are carried at fair value.  Gains and losses on sales of loans are recognized at the loan closing date and are included in noninterest income.  

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past-due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.

● Residential real estate construction loans carry risks that the home will not be finished according to schedule, will not be finished according to the budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

● Land acquisition and development loans and commercial construction loans carry risks that the project will not be finished according to schedule, will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer, in the case of land acquisition and development loans, or the general contractor, in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.

● Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

● Commercial, industrial and agricultural loans carry risks associated with the successful operation of a business. Typically repayment is dependent on the cash flow of the business, and is secured by business assets, such as accounts receivable, equipment, and inventory. There is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.

31

● Equity lines of credit carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.

TDRs (Troubled Debt Restructurings) occur when the Company agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past-due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on a record of making payments as scheduled for a period of six consecutive months.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are charged off when they become 120 days past due. Non-consumer loans are charged off when the loan becomes 180 days past due unless the loan is well secured and in the process of collection. Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:

● Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

● Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

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● Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Company’s credit extension. The payment history for the loan may have been inconsistent, and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Company. There is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Company will be unable to collect all amounts due.

● Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification and are considered impaired.

● Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

● Loss rated loans are not considered collectible under normal circumstances, and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Loan Fees and Costs

Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Property and Equipment

Land is carried at cost. Buildings, equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Estimated useful lives range from ten to forty years for buildings and leasehold improvements, and from three to ten years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance are included in the income statement in the line “Losses on sales and writedowns of other real estate owned, net.”

Bank Owned Life Insurance

The Company purchased seven life insurance policies on certain key executives. These policies are recorded at their cash surrender value. Increases in the cash surrender value of the life insurance contracts are included in noninterest income in the consolidated income statement caption “other income.”

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Advertising Expense

The Company expenses advertising and marketing costs as they are incurred.

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Income Taxes

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statement of income. There are no unrecognized tax benefits as of December 31, 2017 and 2016.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. Potential common shares that may be issued by the Company relate to the outstanding stock options. The remaining convertible preferred stock outstanding was converted to common shares on June 29, 2016. The preferred stock was convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment for stock splits and dividends. The potential dilutive effect of the outstanding stock options is determined using the treasury stock method.

Comprehensive Income

Comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense. These changes for the Company relate solely to unrealized gains and losses on securities available for sale.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”).” The Company early adopted this new standard in the current year. ASU 2018-02 requires reclassification from AOCI to retained earnings for stranded tax effects resulting from the impact of the newly enacted federal income tax rate on items included in AOCI. The amount of this reclassification in 2017 was $24 thousand.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

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Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Stock-Based Compensation Plan

The 2005 Stock Option Plan was approved by stockholders on April 20, 2006, which authorized 550,000 shares of common stock to be used in the granting of incentive options to employees and directors. This plan expired in 2016. Under the plan, the option price could not be less than the fair market value of the stock on the date granted. An option’s maximum term was ten years from the date of grant. Options granted under the plan were subject to a vesting schedule.

The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost was 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.

In 2009, the Board of Directors authorized 137,280 (adjusted for 4% stock dividend in 2016) 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. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments were required to be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of ASU 2016-07 did not have a material impact on the Company’s consolidated financial statements.

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In  June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Bank has formed a committee to address the compliance requirements, data gathering, archiving and analysis efforts.  The Bank plans to begin tracking data during the 2^nd quarter of 2018 and will reassess its position during the 4^th quarter of 2018.  Additionally, the Bank has begun to analyze various software solutions that will assist in complying with this Standard.

In  August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

In  January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU 2017‐08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017‐08 will have on its consolidated financial statements.

During May 2017, the FASB issued ASU 2017‐09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company is currently assessing the impact that ASU 2017‐09 will have on its consolidated financial statements.

During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements.

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Note 2. Investment Securities

Amortized cost and fair value of securities available for sale are as follows:

(Dollars In Thousands)	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	13,475	$	61	$	(101	)	$	13,435
Mortgage-backed securities and CMO’s		24,344		12		(375	)		23,981
Corporate securities		6,991		118		(42	)		7,067
Municipal securities		10,713		213		(65	)		10,861
	$	55,523	$	404	$	(583	)	$	55,344

(Dollars In Thousands)	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	12,422	$	118	$	(96	)	$	12,444
Mortgage-backed securities and CMO’s		19,979		54		(265	)		19,768
Corporate securities		5,000		66		-			5,066
Municipal securities		15,659		266		(228	)		15,697
	$	53,060	$	504	$	(589	)	$	52,975

The primary purpose of the investment portfolio is to generate income, diversify earning assets, and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio is made up primarily of fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business or entity behind the instrument. The primary cause of unrealized losses is the increase in market interest rates over the yields available at the time the securities were purchased.

At December 31, 2017, the Company does not consider any security in an unrealized loss position to be other-than-temporarily impaired.

U.S. Government agency securities. The unrealized losses on twenty-four of the Company’s investments in obligations of the U.S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Mortgage-backed securities and CMO’s. The unrealized losses on thirty-five of the Company’s investments in government-sponsored entity mortgage-backed securities were caused by increases in market interest rates over the yields available at the time the securities were purchased.  Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Corporate securities. The unrealized losses on two of the Company’s investments in corporate securities were caused by increases in market interest rates over the yield available at the time the security was purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2017.

Municipal securities. The unrealized losses on six of the Company’s investments in obligations of municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates and credit spreads, and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

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The following tables demonstrate the unrealized loss position of securities available for sale at December 31, 2017 and 2016.

	December 31, 2017
	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	$	6,859	$	(44	)	$	2,995	$	(57	)	$	9,854	$	(101	)
Mortgage-backed securities and CMO’s		15,624		(192	)		7,386		(183	)		23,010		(375	)
Corporate securities		1,438		(42	)		-		-			1,438		(42	)
Municipal securities		453		(3	)		2,332		(62	)		2,785		(65	)
	$	24,374	$	(281	)	$	12,713	$	(302	)	$	37,087	$	(583	)

	December 31, 2016
	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	$	3,492	$	(32	)	$	3,491	$	(64	)	$	6,983	$	(96	)
Mortgage-backed securities and CMO’s		14,232		(235	)		1,474		(30	)		15,706		(265	)
Corporate Securities		500		(-	)		-		(-	)		500		(-	)
Municipal securities		6,967		(223	)		262		(5	)		7,229		(228	)
	$	25,191	$	(490	)	$	5,227	$	(99	)	$	30,418	$	(589	)

The amortized cost and estimated fair value of securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to prepay obligations with or without call or prepayment penalties.

(Dollars In Thousands)	Amortized Cost		Fair Value
Less than one year	$	245	$	245
Over one through five years		2,963		2,942
Over five through ten years		15,725		15,811
Greater than 10 years		36,590		36,346
	$	55,523	$	55,344

Proceeds from the sales, maturities and calls of securities available for sale in 2017 and 2016 were $20.5 million and $14.4 million, respectively. The Company realized $69 thousand in net gains on sales of forty-five available for sale securities in 2017, compared to $257 thousand from the sales of fourteen securities in the prior year.  The net gain in 2017 included gross gains of $170 thousand net of gross losses of $101 thousand. The prior year included gross gains of $262 thousand and gross losses of $5 thousand. Total pledged securities had a fair market value of $4.0 million at December 31, 2017 and $6.2 million at December 31, 2016. At December 31, 2017, securities having a fair market value of $2.3 million were pledged to secure public deposits, securities pledged to secure Federal Home Loan Bank borrowings totaled $112 thousand, and $1.6 million in securities were pledged for other purposes.

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Note 3. Loans Receivable

The major classifications of loans in the consolidated balance sheets at December 31, 2017 and 2016 were as follows:

(Dollars In Thousands)	December 31,
	2017			2016
Construction:
Residential	$	15,221		$	10,204
Land acquisition, development & commercial		35,601			27,480
Real Estate:
Residential		121,649			111,626
Commercial		173,999			172,248
Commercial, industrial & agricultural		61,129			59,702
Equity lines		28,835			29,956
Consumer		7,693			7,668
Overdrafts		68			107
Total loans		444,195			418,991
Less allowance for loan losses		(3,758	)		(3,636	)
Loans, net	$	440,437		$	415,355

The past-due and nonaccrual status of loans as of December 31, 2017 was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	–	$	–	$	–	$	–	$	15,221	$	15,221	$	–
Land acquisition, development & commercial		43		–		274		317		35,284		35,601		274
Real Estate:
Residential		589		870		546		2,005		119,644		121,649		173
Commercial		278		19		209		506		173,493		173,999		209
Commercial, industrial & agricultural		130		143		392		665		60,532		61,197		403
Equity lines		544		49		–		593		28,242		28,835		49
Consumer		17		2		36		55		7,638		7,693		36
Total	$	1,601	$	1,083	$	1,457	$	4,141	$	440,054	$	444,195	$	1,144

The past-due and nonaccrual status of loans as of December 31, 2016 was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	−	$	−	$	−	$	−	$	10,204	$	10,204	$	−
Land acquisition, development & commercial		−		−		−		−		27,480		27,480		−
Real Estate:
Residential		672		193		577		1,442		110,184		111,626		577
Commercial		115		−		−		115		172,133		172,248		336
Commercial, industrial & agricultural		60		33		−		93		59,716		59,809		11
Equity lines		258		−		−		258		29,698		29,956		−
Consumer		8		6		4		18		7,650		7,668		−
Total	$	1,113	$	232	$	581	$	1,926	$	417,065	$	418,991	$	924

There was one loan, totaling $373 thousand that was past due ninety days or more and still accruing interest at December 31, 2017. There were two residential real estate loans totaling $4 thousand that were past due ninety days or more and still accruing interest at December 31, 2016.

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Impaired loans, which include TDRs of $4.1 million, and the related allowance at December 31, 2017, were as follows:

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		181		331		–		331		10
Real Estate:
Residential		360		640		–		638		30
Commercial		4,098		4,273		–		4,166		161
Commercial, industrial & agricultural		379		379		–		379		15
Equity lines		299		299		–		300		14
Consumer		−		−		–		−		−
Total loans with no allowance	$	5,317	$	5,922	$	–	$	5,814	$	230

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		−		−		−		54		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	−	$	−	$	−	$	54	$	−

Impaired loans, which include TDRs of $6.4 million, and the related allowance at December 31, 2016, were as follows:

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		−		−		–		−		−
Real Estate:
Residential		770		770		–		629		(11	)
Commercial		6,380		6,556		–		6,521		255
Commercial, industrial & agricultural		11		11		–		11		−
Equity lines		−		−		–		−		−
Consumer		−		−		–		−		−
Total loans with no allowance	$	7,161	$	7,337	$	–	$	7,161	$	244

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		115		115		17		122		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	115	$	115	$	17	$	122	$	−

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Troubled Debt Restructurings

At December 31, 2017, four loans totaling $4.1 million were classified as troubled debt restructurings (“TDRs”). Two of the four loans totaling $3.9 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2017. The other two loans from one borrower totaled $219 thousand and were on nonaccrual status at year end 2017. All four TDRs were current with their restructured terms at December 31, 2017.

At December 31, 2016, five loans totaling $6.4 million were classified as troubled debt restructurings. Three of the five loans totaling $6.2 million were performing in accordance with their restructured terms and were not on nonaccrual status at year end 2016. The other two loans from one borrower totaled $231 thousand and were on nonaccrual status at year end 2016. All five TDRs were current with their restructured terms at December 31, 2016.

There was no valuation allowance related to total TDRs at December 31, 2017 or December 31, 2016.

No loans were modified in a TDR during the years ended December 31, 2017 or December 31, 2016.

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

 Note 4. Allowance for Loan Losses

The following table presents, as of December 31, 2017, 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, 2017	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	$	63	$	−		$	−	$	31		$	94	$	−	$	94	$	15,221	$	−	$	15,221
Land acquisition, development & commercial		173		(150	)		−		288			311		−		311		35,601		181		35,420
Real estate:
Residential		866		(293	)		−		382			955		−		955		121,649		360		121,289
Commercial		1,516		(454	)		43		498			1,603		−		1,603		173,999		4,098		169,901
Commercial, industrial & agricultural		461		(80	)		−		60			441		−		441		61,197		379		60,818
Equity lines		338		−			−		(101	)		237		−		237		28,835		299		28,536
Consumer		97		(101	)		15		97			108		−		108		7,693		−		7,693
Unallocated		122		−			−		(113	)		9		−		9		−		−		−
Total	$	3,636	$	(1,078	)	$	58	$	1,142		$	3,758	$	−	$	3,758	$	444,195	$	5,317	$	438,878

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The following table presents, as of December 31, 2016, 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, 2016	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	$	83	$	−		$	−	$	(20	)	$	63	$	−	$	63	$	10,204	$	−	$	10,204
Land acquisition, development & commercial		187		(2	)		−		(12	)		173		−		173		27,480		−		27,480
Real estate:
Residential		1,047		(4	)		45		(222	)		866		−		866		111,626		770		110,856
Commercial		1,001		(606	)		−		1,121			1,516		17		1,499		172,248		6,495		165,753
Commercial, industrial & agricultural		531		(34	)		−		(36	)		461		−		461		59,809		11		59,798
Equity lines		277		(99	)		10		150			338		−		338		29,956		−		29,956
Consumer		85		(103	)		49		66			97		−		97		7,668		−		7,668
Unallocated		87		−			−		35			122		−		122		−		−		−
Total	$	3,298	$	(848	)	$	104	$	1,082		$	3,636	$	17	$	3,619	$	418,991	$	7,276	$	411,715

Loans by credit quality indicators as of December 31, 2017 were as follows:

(Dollars in Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Doubtful Nonaccrual		Total
Construction loans:
Residential	$	15,221	$	−	$	−	$	−	$	−	$	15,221
Land acquisition, development & commercial		31,433		3,987		−		181		−		35,601
Real estate loans:
Residential		120,575		342		559		−		173		121,649
Commercial		165,760		7,386		644		209		−		173,999
Commercial, industrial, agricultural		59,042		1,249		503		379		24		61,197
Equity lines		28,536		−		299		−		−		28,835
Consumer		7,658		−		−		35		−		7,693
Total Loans	$	428,225	$	12,964	$	2,005	$	804	$	197	$	444,195

At December 31, 2017, the Company does not have any loans classified as Loss.

Loans by credit quality indicators as of December 31, 2016 were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,204	$	−	$	−	$	−	$	10,204
Land acquisition, development & commercial		27,480		−		−		−		27,480
Real estate loans:
Residential		110,856		−		193		577		111,626
Commercial		171,369		−		543		336		172,248
Commercial, industrial, agricultural		59,120		78		600		11		59,809
Equity lines		29,956		−		−		−		29,956
Consumer		7,668		−		−		−		7,668
Total Loans	$	416,653	$	78	$	1,336	$	924	$	418,991

At December 31, 2016, the Company did not have any loans classified as Doubtful or Loss.

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Note 5. Other Real Estate Owned

Changes in other real estate owned for 2017 were as follows:

(Dollars in Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	4,619		$	(825	)	$	3,794
Additions		1,024			—			1,024
Writedowns		—			(588	)		(588	)
Sales		(1,597	)		616			(981	)
Balance at the end of the year	$	4,046		$	(797	)	$	3,249

Changes in other real estate owned for 2016 were as follows:

(Dollars in Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	5,657		$	(420	)	$	5,237
Additions		481			—			481
Writedowns		—			(405	)		(405	)
Sales		(1,519	)		—			(1,519	)
Balance at the end of the year	$	4,619		$	(825	)	$	3,794

The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2017 and December 31, 2016 were as follows:

(Dollars in Thousands)	2017		2016
Residential lots	$	1,745	$	2,234
Residential development		-		423
Residential real estate		1,024		-
Commercial lots		90		90
Commercial buildings		390		1,047
Total Other Real Estate Owned	$	3,249	$	3,794

Other real estate owned related expenses in the consolidated statements of income for the years ended December 31, 2017 and December 31, 2016 include:

(Dollars in Thousands)	2017			2016
Net (gain)/loss on sales	$	(7	)	$	90
Provision for unrealized losses		588			405
Operating expenses		106			97
Total Other Real Estate Owned	$	687		$	592

Note 6. Property and Equipment

The major components of property and equipment at December 31, 2017 and 2016 were as follows:

(Dollars in Thousands)	2017		2016
Land	$	4,309	$	4,309
Buildings and improvements		8,617		8,617
Leasehold improvements		2,154		2,156
Furniture and equipment		2,314		3,214
Software		296		556
Construction in process		4		10
Property and equipment, total		17,694		18,862
Less accumulated depreciation and amortization		4,757		5,491
Property and equipment, net	$	12,937	$	13,371

Depreciation and amortization expense was $726 thousand and $754 thousand for the years ended December 31, 2017 and 2016, respectively.

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Leases

The Company currently leases its main office under a non-cancelable lease agreement. The lease has a ten-year term and expires on December 31, 2025. The agreement provides an option to extend the lease for one additional ten-year term at expiration. Terms of the new agreement provide for an annual rental increase, beginning January 1, 2017, based on a published inflation index, not to exceed three percent over the rent for the immediately preceding lease year. The Company currently leases a branch location under a non-cancelable lease agreement. The original lease expired on July 31, 2016. The lease was renewed for one additional term of ten years and it provides an option to extend the lease for two additional, consecutive five-year terms. The newly negotiated lease expires July 31, 2026. The Company currently leases space to operate an automated teller machine under a non-cancelable lease agreement. The term of the eight year lease commenced on April 1, 2013 and expires on April 1, 2021. The lease provides an option to extend the term for two additional five-year periods. Terms of the agreement provide for an annual rental increase of three percent over the rent for the immediately preceding lease year. HomeTown Residential Mortgage, LLC leases space in Roanoke and Christiansburg for its mortgage operations. Both leases are for a term of twelve months and renew under the same terms unless 60 days’ notice is provided by the lessor or the Company. The Roanoke lease expires every May 31 and the Christiansburg lease expires every September 30.

The current minimum annual lease payments under non-cancelable leases in effect at December 31, 2017 were as follows:

(Dollars In Thousands)	2017
2018	$	288
2019		274
2020		274
2021		268
2022		270
Thereafter		875
Total	$	2,249

Rent expense for the years ended December 31, 2017 and 2016 was $304 thousand and $307 thousand, respectively, and is included in occupancy and equipment expense on the Company’s consolidated statements of income.

Note 7. Deposits

The aggregate amount of time deposits in denominations of over $250,000 at December 31, 2017 and 2016 were $8.3 million and $9.8 million, respectively.

At December 31, 2017, the scheduled maturities of time deposits are as follows:

(Dollars In Thousands)	2017
2018	$	76,524
2019		27,215
2020		14,492
2021		6,355
2022 and thereafter		6,878
Total	$	131,464

The Company obtains certain deposits through the efforts of third-party deposit brokers. At December 31, 2017 and 2016, brokered deposits totaled $33.1 million and $28.5 million, respectively, and were included in interest-bearing deposits on the consolidated balance sheets. There were no deposit relationships over 5% of total deposits at the end of 2017.

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Note 8. Federal Home Loan Bank Borrowings

The Company has outstanding debt with the Federal Home Loan Bank of Atlanta in the amount of $11.0 million and $8.0 million as of December 31, 2017 and 2016, respectively. The Federal Home Loan Bank debt at December 31, 2017 is comprised of five fixed rate advances totaling $11.0 million.

At December 31, 2017 and 2016, borrowings from the Federal Home Loan Bank of Atlanta were as follows:

(Dollars In Thousands)
Advance Date	Maturity Date	Conversion Date	Current Rate	2017		2016
January 14, 2015	January 16, 2018	Quarterly	1.090%	$	4,000	$	4,000
August 19, 2016	August 20, 2018	Quarterly	2.535%		4,000		4,000
January 3, 2017	January 3, 2020	N/A	1.500%		695		-
February 3, 2017	February 3, 2020	N/A	1.490%		722		-
May 3, 2017	May 4, 2010	N/A	1.580%		1,611		-
				$	11,028	$	8,000

The Company had collateral pledged on these borrowings at December 31, 2017, including real estate loans totaling $21.4 million, investment securities totaling $103 thousand, and Federal Home Loan Bank stock with a book value of $967 thousand.

Note 9. Subordinated Notes

On December 18, 2015, the Company completed the issuance of $7.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various institutional accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of December 30, 2025 and have an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes will have a floating interest rate based on LIBOR. Interest will be paid semi-annually, in arrears, on June 30 and December 30 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date.

(Dollars in Thousands)
As of December 31, 2017	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	246	$	7,254

(Dollars in Thousands)
As of December 31, 2016	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	276	$	7,224

For the years ended December 31, 2017 and 2016, the average effective interest rate was 7.41% and 7.44%, respectively.

The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company’s payments to general and secured creditors and depositors of its wholly owned subsidiary, HomeTown Bank.

The notes are redeemable, without penalty, on or after December 30, 2020 and, in certain limited circumstances, prior to that date.

The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is not “well capitalized” for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

Note 10. Other Borrowings

Other borrowings consist of the following at December 31, 2017 and 2016:

(Dollars In Thousands)	2017			2016
Securities sold under agreements to repurchase	$	-		$	452
Warehouse line of credit		1,558			665
	$	1,558		$	1,117
Weighted average interest rate at December 31		4.11	%		2.07	%

Securities sold under agreements to repurchase are secured transactions with customers and generally mature the day following the day sold. Short-term borrowings may also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions. 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 amount borrowed on the $5.0 million warehouse line of credit was $1.6 million at year end 2017 at a rate of LIBOR plus 2.75%. The Company had $36.5 million of federal funds lines of credit available at year-end 2017. In addition, the Company had access to a $10.0 million credit line through Promontory’s Insured Cash Sweep (ICS) one way buy program at a rate of the one month LIBOR plus 11 basis points but not less than 20 basis points. At December 31, 2017 and 2016, there were no advances on the federal funds or credit lines.

45

Note 11. Fair Value Measurements

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

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

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

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

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

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

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016:

(Dollars in Thousands)			Carrying value at December 31, 2017
Description	Balance as of December 31, 2017		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	$	13,435	$	–	$	13,435	$	–
Mortgage-backed securities and CMO’s		23,981		–		23,981		–
Corporate securities		7,067		–		7,067		–
Municipal securities		10,861		–		10,861		–

(Dollars in Thousands)			Carrying value at December 31, 2016
Description	Balance as of December 31, 2016		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	$	12,444	$	–	$	12,444	$	–
Mortgage-backed securities and CMO’s		19,768		–		19,768		–
Corporate securities		5,066		–		5,066		–
Municipal securities		15,697		–		15,697		–

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:

46

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.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016.

(Dollars in Thousands)			Carrying value at December 31, 2017
Description	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale	$	1,587	$	–	$	1,587	$	–
Other real estate owned		3,249		–		–		3,249

(Dollars in Thousands)			Carrying value at December 31, 2016
Description	Balance as of December 31, 2016		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	$	98	$	–	$	–	$	98
Loans held for sale		678		–		678		–
Other real estate owned		3,794		–		–		3,794

At December 31, 2017 and December 31, 2016, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2017:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2017
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Other real estate owned	$	2,254	Discounted appraised value	Selling cost	6	%	-	10	%	(8%	)
				Discount for lack of marketability and age of appraisal	0	%	-	43	%	(7%	)
	$	995	Internal evaluations	Internal evaluations	19	%	-	19	%	(19%	)

47

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2016:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2016
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	98	Discounted appraised value	Residual cash flows discount rate	6	%	-	6	%	(6%	)
Other real estate owned	$	1,560	Discounted appraised value	Selling cost	6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal	4	%	-	12	%	(10%	)
	$	2,234	Internal evaluations	Internal evaluations	4	%	-	54	%	(24%	)

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.

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

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 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.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 30 days approximate their fair values.

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.

Subordinated notes: The fair values is 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).

Accrued interest: The carrying amount of accrued interest receivable and payable approximates fair value.

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At December 31, 2017 and 2016, the fair value of loan commitments and standby letters of credit was deemed to be immaterial.

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The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2017:

(Dollars in Thousands)			Fair value at December 31, 2017
Description	Carrying value as of December 31, 2017		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	$	21,714	$	21,714	$	–	$	–	$	21,714
Federal funds sold		180		180		–		–		180
Securities available for sale		55,344		–		55,344		–		55,344
Restricted equity securities		2,371		–		2,371		–		2,371
Loans held for sale		1,587		–		1,587		–		1,587
Loans, net		440,437		–		–		438,449		438,449
Bank owned life insurance		8,669		–		8,669		–		8,669
Accrued income		2,681		–		2,681		–		2,681
Financial liabilities
Total deposits		477,320		–		477,599		–		477,599
FHLB borrowings		11,028		–		11,150		–		11,150
Subordinated notes		7,254		–		7,890		–		7,890
Other borrowings		1,558		–		1,558		–		1,558
Accrued interest payable		368		–		368		–		368

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at December 31, 2016:

(Dollars In Thousands)			Fair value at December 31, 2016
Description	Carrying value as of December 31, 2016		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	$	18,229	$	17,479	$	760	$	–	$	18,239
Federal funds sold		42		42		–		–		42
Securities available for sale		52,975		–		52,975		–		52,975
Restricted equity securities		2,213		–		2,213		–		2,213
Loans held for sale		678		–		678		–		678
Loans, net		415,355		–		–		415,039		415,039
Bank owned life insurance		7,469		–		7,469		–		7,469
Accrued income		2,289		–		2,289		–		2,289
Financial liabilities
Total deposits		450,848		–		451,385		–		451,385
FHLB borrowings		8,000		–		8,031		–		8,031
Subordinated notes		7,224		–		8,012		–		8,012
Other borrowings		1,117		–		1,117		–		1,117
Accrued interest payable		386		–		386		–		386

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Note 12. 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 years ended December 31, 2017 and 2016, as all of the Series C Preferred Stock was converted to common stock during 2016.

	For the Years Ended December 31,
	2017						2016
Dollars in Thousands, except share and per share data	Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount		Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		5,769,752	$	2,496	$	0.43		4,652,853	$	2,111	$	0.45
Effect of dilutive securities:
Convertible preferred stock		−		−		−		1,112,970		−		(0.08	)
Dilutive stock options		34,630		−		−		10,469		−		−
Earnings per common share, diluted		5,804,382	$	2,496	$	0.43		5,776,292	$	2,111	$	0.37

At December 31, 2017 and 2016, the number of stock options considered antidilutive and excluded from the calculation of diluted weighted average shares was 38,500 and 190,531, respectively. Non-vested 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 dividends during the vesting period.

Note 13. Stock Based Compensation

The Company recorded stock based compensation expense of $148 thousand and $147 thousand for the years ended December 31, 2017 and 2016, respectively.

The 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors granted stock options to directors, officers and employees expired in 2016, thus there are no options available for future issuance. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost was measured at the grant date based on the fair value of the award and was and continues to be recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. 

The Company used the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards was affected by the price of the Company's stock and a number of financial assumptions and variables. These variables included the risk-free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options.  No stock options were granted during 2017 or 2016. Compensation expense is charged to income ratably over the vesting period and was $71 thousand in 2017 and $75 thousand in 2016. As of December 31, 2017, there was $140 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next two years.  At the discretion of the Board of Directors, the stock option plan was not modified for the 4% stock dividend distributed on July 11, 2016

A summary of option activity under the 2005 stock option plan during the year ended December 31, 2017 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2016		201,000		$	7.80
Granted		–			–
Exercised		(4,500	)		6.90
Expired		(9,500	)		8.69
Forfeited		–			–
Balance at December 31, 2017		187,000		$	7.78	$	641,131		5.62
Exercisable at December 31, 2017		125,800		$	8.21	$	379,568		4.96

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2017.

In 2009, the Board of Directors authorized 137,280 shares, restated for the 4% stock dividend distributed July 11, 2016, 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 $77 thousand in 2017 and $72 thousand in 2016. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The weighted-average grant date fair value of restricted stock granted in 2017 was $10.24 compared to $9.09* in 2016.  The Company granted 13,258 and 11,149* shares of restricted stock under the plan in 2017 and 2016, respectively.

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As of December 31, 2017, there was $216 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2022. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	2017					2016
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		31,546		$	7.03		39,352	*	$	6.00	*
Granted		13,258			10.24		11,149	*		9.09	*
Vested		(11,920	)		6.18		(12,167	)*		5.63	*
Forfeited		(797	)		8.37		(6,788	)*		6.99	*
Nonvested at the end of the period		32,087		$	8.63		31,546	*	$	7.03	*

* Restated for the 4% stock dividend distributed July 11, 2016.

Note 14. Salary Continuation Plan

The Company has a Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income. The Supplemental Executive Retirement Plan (the “SERP”) provides lifetime payments equal to 20% of a participant’s average annual base salary for the five years immediately prior to retirement. There is an incentive formula with an additional benefit of 20% of a participant’s average annual base salary for the five years immediately prior to retirement if performance targets set by the Board of Directors are met. The SERP contains provisions for disability and survivor benefits, a benefits vesting schedule based on age attained and automatic full vesting in the event of a change in control of the Company. During 2016, the SERP was increased to provide for the individual who filled the position of Chief Financial Officer (CFO), upon the former CFO’s retirement. Accrued deferred compensation expense under the SERP, included in other liabilities, totaled $1.0 million and $666 thousand at the end of 2017 and 2016, respectively. Compensation expense related to the SERP was $357 thousand for 2017 compared to $351 thousand for 2016. The funding mechanism for the plan is Bank Owned Life Insurance policies on the lives of the participants.

Note 15. Employee Benefit Plan

The Company adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. The Company makes non-discretionary matching contributions of 100% of the employee’s deferral up to 3% of compensation and matches 50% of the employee’s next 3% deferral. In addition, the Company may make additional contributions at the discretion of the Board of Directors. The Company’s matching contributions were $263 thousand and $240 thousand for the years ended December 31, 2017 and 2016, respectively.

Note 16. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2014.

The current and deferred components of income tax expense for the periods ended December 31, 2017 and 2016 are as follows:

(Dollars In Thousands)	2017			2016
Current	$	1,351		$	1,496
Deferred		(123	)		(56	)
Income tax expense	$	1,228		$	1,440

Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $100 thousand, recorded as a result of the enactment of H.R.1 Tax Cuts and Jobs Act on December 22, 2017. The Act reduced the corporate Federal tax rate from 34% to 21% effective January 1, 2018

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Rate Reconciliation

Total income tax expense differed from the “expected” amount computed by applying the U.S. Federal income tax rate of 34 percent to income before income taxes as a result of the following.

(Dollars In Thousands)	2017			2016
Tax at statutory federal rate	$	1,291		$	1,367
Tax-exempt interest income		(116	)		(201	)
Cash surrender value of life insurance		(68	)		(63	)
Incentive stock options		24			261
Tax impact from enacted change in tax rate		100			–
Other		(3	)		76
Income tax expense	$	1,228		$	1,440

Deferred Income Tax Analysis

The significant components of net deferred taxes at December 31, 2017 and 2016 are summarized as follows:

(Dollars In Thousands)	2017		2016
Deferred tax assets
Pre-opening expenses	$	28	$	62
Allowance for loan losses		528		693
Deferred compensation		215		226
Other real estate expenses		187		280
Unrealized loss on securities available for sale		38		29
Nonaccrual loan interest		9		17
Other		17		21
Deferred tax asset		1,022		1,328
Deferred tax liabilities
Property and equipment		230		305
Deferred loan fees		613		980
Other		17		13
Deferred tax liability		860		1,298
Net deferred tax asset	$	162	$	30

Note 17. Commitments and Contingencies

Litigation

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.

Credit Related Financial Instruments

The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheet.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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A summary of the Company’s commitments at December 31, 2017 and 2016 is as follows (dollars in thousands):

(Dollars In Thousands)	2017		2016
Commitments to extend credit	$	109,285	$	102,277
Standby letters of credit		6,711		4,255

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

The Company is required to maintain certain required reserve balances with the Federal Reserve Bank. At December 31, 2017 and 2016, these reserve balances amounted to $9.6 million and $6.6 million, respectively.

The Company from time to time may have cash and cash equivalents on deposit with financial institutions that exceed federally insured limits. Balances in excess of FDIC insured amounts totaled $5.9 million and $7.2 million at December 31, 2017 and 2016, respectively.

Purchase Obligation

On November 1, 2015, the Company entered into a three year marketing agreement involving naming, advertising, and sponsorship rights. This agreement was replaced with a new agreement effective July 1, 2016. The new term was for three years, with options for a fourth and fifth year, and expanded the exclusivity of marketing rights and increased signage. In relation to these agreements, the Company expensed $55.0 thousand and $57.5 thousand in 2017 and 2016, respectively. The agreement obligates the Company to pay $65.0 thousand in 2018 and $32.5 thousand for the first half of 2019 for these rights.

Note 18. Regulatory Restrictions

Dividends

The Company, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any company when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Company. At December 31, 2017, there was $3.8 million in retained earnings available from which to pay dividends to common stockholders. No cash dividends were paid to common stockholders in 2017 or 2016. A stock dividend was distributed in 2016 and is discussed in Note 20 Capital Transactions.

Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in January 1, 2019. As part of the new requirements, the Common Equity Tier 1 Capital is calculated and utilized in the assessment of capital for all institutions. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2017 and 2016, the most recent regulatory notifications categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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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 make 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 new rules introduced 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 final new capital rules required the Company to comply with the following new minimum capital ratios (including the capital conservation buffer), effective January 1, 2017 and 2016, respectively: (1) a new common equity Tier 1 capital ratio of 5.75% and 5.125% of risk-weighted assets; (2) a Tier 1 capital ratio of 7.25% and 6.625% of risk-weighted assets; (3) a total capital ratio of 9.25% and 8.625% of risk-weighted assets; and (4) a leverage ratio of 4% of total assets. 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I common equity, and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the applicable regulations. As of December 31, 2017, management believes the Bank met all capital adequacy requirements to which it was subject.

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

HomeTown Bank December 31, 2017	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)	$	61,257		12.48	%	$	45,403		9.25	%	$	49,084		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		57,474		11.71	%		28,222		5.75	%		31,903		6.50	%
Tier I Capital (to Risk-Weighted Assets)		57,499		11.72	%		35,569		7.25	%		39,248		8.00	%
Tier I Capital (to Average Assets)		57,499		10.39	%		22,136		4.00	%		27,670		5.00	%

HomeTown Bank December 31, 2016	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) %	$	58,436		12.59	%	$	40,045		8.625	%	$	46,429		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		54,783		11.80	%		23,795		5.125	%		30,179		6.50	%
Tier I Capital (to Risk-Weighted Assets)		54,800		11.80	%		30,759		6.625	%		37,143		8.00	%
Tier I Capital (to Average Assets)		54,800		10.67	%		20,537		4.00	%		25,671		5.00	%

Note 19. Transactions with Related Parties

The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:

(Dollars In Thousands)	2017			2016
Balance, beginning	$	8,194		$	7,124
New loans		392			5,261
Repayments		(4,637	)		(4,191	)
Balance, ending	$	3,949		$	8,194

Repayments of loans to related parties include $575 thousand in loans removed from related party disclosure due to a change in directorship in 2016.

Aggregate deposit balances with related parties at December 31, 2017 and 2016 were $12.5 million and $16.7 million, respectively.

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Note 20. Capital Transactions

The Board of Directors declared a 4% common stock dividend on May 10, 2016 to holders of record June 9, 2016. The stock dividend was distributed on July 11, 2016. The stock dividend increased the number of shares issued and outstanding by 134,177.

On June 28, 2013, HomeTown Bankshares Corporation completed a $14,000,000 private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated April 17, 2013 and amended thereafter, the Company sold 14,000 shares of its 6.0% Series C Non-Cumulative Perpetual Convertible Preferred Stock at a price of $1,000 per share. The convertible preferred stock paid quarterly dividends equivalent to six percent (6.0%) per annum, and was convertible into shares of common stock of the Company based on a conversion price of $6.25 per share, subject to adjustment. The Company paid $408 thousand in dividends on Series C preferred stock in 2016. For the year 2015, 400 shares of preferred stock were converted to 64,000 shares of common stock. The remaining 13,600 shares of preferred stock were converted to 2,176,000 shares of common stock on June 29, 2016. The preferred shareholders were entitled to the 4% stock dividend declared by the Board of Directors on May 10, 2016 and received an additional 87,037 shares of common stock. 

Note 21. Reclassifications Out of Other Comprehensive Income

Items not reclassified in their entirety to net income for the years ended December 31, 2017 and 2016 are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Years Ended December 31,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2017		2016
Available for sale securities
Realized gains on sales of securities held for sale during the period	$	69	$	257	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		24		87	Income tax expense
	$	45	$	170	Net income

Note 22. Condensed Parent Company Financial Information

Financial information pertaining only to HomeTown Bankshares Corporation follows.

CONDENSED BALANCE SHEETS
Dollars In Thousands	December 31, 2017		December 31, 2016
Assets
Cash and due from banks	$	313	$	298
Investment in bank subsidiary		57,333		54,727
Other assets		3		—
Total assets	$	57,649	$	55,025
Liabilities and Stockholders’ Equity
Other liabilities	$	12	$	12
Subordinated notes		7,254		7,224
Total liabilities		7,266		7,236
Stockholders’ equity:
Total stockholders’ equity		50,383		47,789
Total liabilities and stockholders’ equity	$	57,649	$	55,025

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CONDENSED STATEMENTS OF INCOME
Dollars In Thousands	For the year ended December 31, 2017			For the year ended December 31, 2016
Dividend from Bank subsidiary	$	511		$	—
Income		511			—
Interest expense		537			536
Other expenses		272			302
Expenses		809			838
Net loss before income taxes		(298	)		(838	)
Income tax benefit		275			278
Net loss before equity in undistributed net income of subsidiary		(23	)		(560	)
Undistributed net income of subsidiary		2,519			3,079
Net Income	$	2,496		$	2,519

CONDENSED STATEMENTS OF CASH FLOWS
Dollars In Thousands	For the year ended December 31, 2017			For the year ended December 31, 2016
Cash flows from operating activities:
Net income	$	2,496		$	2,519
Equity in undistributed net income of subsidiary bank		(2,519	)		(3,079	)
Amortization expense on subordinated notes		30			30
(Increase) decrease in other assets		(3	)		7
Decrease in interest payable		—			(18	)
Decrease in other liabilities		—			(295
Net cash flows provided by (used in) operating activities		4			(836	)
Cash flows from financing activities:
Preferred dividend payment		—			(408	)
Exercise of stock options		31			—
Net settlement of vested restricted stock		(20	)		(29	)
Cash in lieu of fractional shares		—			(5	)
Net cash flows provided by (used in) financing activities		11			(442	)
Net increase (decrease) in cash and cash equivalents		15			(1,278	)
Cash and cash equivalents, beginning		298			1,576
Cash and cash equivalents, ending	$	313		$	298
Supplemental disclosure of cash flow information:
Cash payments for interest	$	506		$	554

Note 23. Subsequent Events

On March 19, 2018, we received notice that a former executive of the company had passed away. We are working with insurance carriers, but as of the date of this filing, are unable to determine what net proceeds will be received from the bank owned life insurance policy. We have evaluated subsequent events after December 31, 2017 and concluded that no other material transactions occurred through the date of this filing.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

HomeTown Bankshares Corporation

Roanoke, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of HomeTown Bankshares Corporation and subsidiary (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of HomeTown Bankshares Corporation and subsidiary as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company's auditor since 2005.

Roanoke, Virginia

March 30, 2018

57

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures by the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e) and 15d-15(e), were effective to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

HomeTown Bankshares Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. HomeTown Bankshares Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of HomeTown Bankshares’ internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in 2013. Based on this assessment, management believes that, as of December 31, 2017, HomeTown Bankshares’ internal control over financial reporting was effective.

This annual report does not include an attestation report of HomeTown Bankshares’ registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by HomeTown Bankshares’ registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit filers to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The information required by this item relating to the Company’s directors and nominees is included under the captions “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders and is incorporated herein by reference.

The information required by this item relating to the Bank’s executive officers is included under the caption “Executive Officers of the Registrant” in Part I of this report.

58

The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders and is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its directors and executive officers, including its Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is posted to the Investor Relations section of the Company’s website at www.hometownbank.com. In addition, a copy of the Code of Ethics may be obtained without charge by written request to the Company’s corporate secretary.

The information required by this item relating to the Company’s Audit Committee is included under the captions “Item 1: Election of Directors,” “Audit Committee Matters” and “—Audit Committee Report” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required to be disclosed in this item 11 is included under the caption “Executive Compensation” of the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required to be disclosed in this item 12 is relating to security ownership of certain beneficial owners and management is included under the caption “Common Stock Ownership” in the Company’s Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated herein by reference.

Equity Compensation Plans

The following table summarizes information concerning the Company’s equity compensation plans as of December 31, 2017.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		187,000	(2)	$	7.78		N/A	(3)
Equity compensation plans not approved by security holders		0			N/A		59,849	(4)

(1) Excludes restricted stock awards currently vesting under the Restricted Stock Plan. See Part II, Item 8, Note 12 for a detailed discussion of the Restricted Stock Plan.

(2) Represents options to purchase common stock outstanding under the 2005 Stock Option Plan. See Part II, Item 8, Note 13 for a detailed discussion of the Restricted Stock Plan.

(3) The 2005 Stock Option Plan expired in 2016 and no shares are available for future issuance.

(4) Represents shares available for future issuance under the Restricted Stock Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item relating to review, approval or ratification of transactions with related persons is included under the caption “Certain Relationships and Related Transactions,” and the information required by this item relating to director independence is included under the caption “Item 1: Election of Directors” and “Directors Meetings, Committees and Fees, Leadership Structure, Oversight of Risk and Communications with Directors” in the Bank’s Proxy Statement for the 2018 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required to be disclosed in this item 14 is included under the captions “Audit Committee Matters” and “Item III: Ratification of Independent Auditors” in the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders and is incorporated herein by reference.

59

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements:

Consolidated Balance Sheets as of December 31, 2017 and 2016

Consolidated Statements of Income for the Years Ended December 31, 2017 and 2016

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016

Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016

Report of Independent Registered Public Accounting Firm

Exhibit Number
3.1	Articles of Incorporation of Registrant as amended incorporated herein by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2011.
3.2	By-laws of Registrant included as Appendix B-2 to the proxy statement contained in, and incorporated by reference to the Registrant’s registration statement on Form S-4 (No. 333-158525) filed June 26, 2009).
4.1	See Exhibit 3.1.
10.2*	Employment Agreement dated March 1, 2006 between HomeTown Bank and S. K. Still, incorporated herein by reference to Exhibit 10.2 to Form 10QSB for the quarter ended March 31, 2006.
10.3*	Employment Agreement dated March 1, 2006 between HomeTown Bank and W. C. Moses, incorporated herein by reference to Exhibit 10.3 to Form 10QSB for the quarter ended March 31, 2006.
10.4	Real estate purchase contract, incorporated herein by reference to Exhibit 10.5 to Form 10QSB for the quarter ended June 30, 2006.
10.5	Lease agreement, incorporated herein by reference to Exhibit 10.7 to form 10QSB for the quarter ended September 30, 2006.
10.6*	Hometown Bankshares Corporation Restricted Stock Plan, Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 16, 2009.
10.7	Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated September 18, 2009, between HomeTown Bankshares Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Series B Preferred Stock, incorporated herein by reference to Exhibit 10.1 to Form 8-K filed September 24, 2009.
10.8*	Form of Compensation Modification Agreement and Waiver, executed by Senior Executive Officers of HomeTown Bankshares Corporation, incorporated herein by reference to Exhibit 10.2 to Form 8-K filed September 24, 2009.
10.9*	Supplemental Executive Retirement Plan by and between Hometown Bank and Susan K. Still incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013.
10.10*	Supplemental Executive Retirement Plan by and between Hometown Bank and Vance W. Adkins, incorporated herein by reference to Exhibit 10.10 to Form 10-K for the year ended December 31, 2016.
10.11*	Employment Agreement (“Agreement”), made as of the 5th day of August, 2016, among HomeTown Bank, a Virginia Banking Corporation, HomeTown Bankshares Corporation, a Virginia incorporated registered bank holding company (collectively with HomeTown Bank, the “Employer”) and Vance Adkins (“Employee”), incorporated herein by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.
21	Subsidiaries of the Registrant
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 Annual Report on Form 10-K for the year ended December 31, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2017 and 2016; (ii) Consolidated Statements of Income for the years ended December 31, 2017, and 2016; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, and 2016; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements.

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

ITEM  16.        FORM 10K SUMMARY.

None.

60

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HOMETOWN BANKSHARES CORPORATION
Date: March 30, 2018	By:	/S/    SUSAN K. STILL
		Susan K. Still President Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/    SUSAN K. STILL	Director, President, and	March 30, 2018
Susan K. Still	Chief Executive Officer (principal executive officer)
/S/    GEORGE B. CARTLEDGE, JR.	Director	March 30, 2018
George B. Cartledge, Jr.
/S/    NANCY H. AGEE	Director	March 30, 2018
Nancy H. Agee
/S/    WARNER N. DALHOUSE	Director	March 30, 2018
Warner N. Dalhouse
/S/    MARC S. FINK	Director	March 30, 2018
Marc S. Fink
/S/    DANIEL D. HAMRICK	Director	March 30, 2018
Daniel D. Hamrick
/S/    WILLIAM R. RAKES	Director	March 30, 2018
William R. Rakes
/S/    JAMES M. TURNER, JR.	Director	March 30, 2018
James M. Turner, Jr.
/S/    VANCE W ADKINS	Chief Financial Officer	March 30, 2018
Vance W. Adkins	(principal accounting and financial officer)

61

EX-21

Exhibit 21

Subsidiaries of the Registrant

HomeTown Bank, Roanoke, Virginia

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Susan K. Still certify that:

1.I have reviewed this annual report on Form 10-K of HOMETOWN BANKSHARES CORPORATION.

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and

d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2018	/s/ Susan K. Still
	Susan K. Still
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Vance W. Adkins certify that:

1.I have reviewed this annual report on Form 10-K of HOMETOWN BANKSHARES CORPORATION.

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and

d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2018	/s/ Vance W. Adkins
	Vance W. Adkins
	Executive Vice President
	Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF FINANCIAL REPORTS PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-K filed by HOMETOWN BANKSHARES CORPORATION (the “Issuer”) for the year ended December 31, 2017, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer [on the dates and for the periods presented therein].

HOMETOWN BANKSHARES CORPORATION

Date: March 30, 2018	By:	/s/ Susan K. Still
		Susan K. Still
		President and Chief Executive Officer
Date: March 30, 2018	By:	/s/ Vance W. Adkins
		Vance W. Adkins
		Executive Vice President
		Chief Financial Officer

XML

Document And Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2017	Mar. 30, 2018	Jun. 30, 2017
Document Information [Line Items]
Entity Registrant Name	HomeTown Bankshares Corp
Entity Central Index Key	0001461640
Trading Symbol	hmta
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		5,800,683
Entity Public Float			$ 57,945,887
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Assets
Cash and due from banks	$ 21,714	$ 18,229
Federal funds sold	180	42
Securities available for sale, at fair value	55,344	52,975
Restricted equity securities, at cost	2,371	2,213
Loans held for sale	1,587	678
Loans, net of allowance for loan losses of $3,758 in 2017 and $3,636 in 2016	440,437	415,355
Property and equipment, net	12,937	13,371
Other real estate owned, net of valuation allowance of $797 in 2017 and $825 in 2016	3,249	3,794
Bank owned life insurance	8,669	7,469
Accrued income	2,681	2,289
Other assets	1,084	875
Total assets	550,253	517,290
Liabilities and Stockholders’ Equity
Noninterest-bearing	106,956	91,354
Interest-bearing	370,364	359,494
Total deposits	477,320	450,848
Federal Home Loan Bank borrowings	11,028	8,000
Subordinated notes	7,254	7,224
Other borrowings	1,558	1,117
Accrued interest payable	368	386
Other liabilities	1,833	1,490
Total liabilities	499,361	469,065
Commitments and contingencies
Stockholders’ equity:
Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 5,775,597 (includes 32,087 restricted shares) at December 31, 2017 and 5,760,735 (includes 31,546 restricted shares) at December 31, 2016	28,777	28,765
Surplus	17,980	17,833
Retained earnings	3,767	1,247
Accumulated other comprehensive loss	(141)	(56)
Total HomeTown Bankshares Corporation stockholders’ equity	50,383	47,789
Noncontrolling interest in consolidated subsidiary	509	436
Total stockholders’ equity	50,892	48,225
Total liabilities and stockholders’ equity	$ 550,253	$ 517,290

XML

Consolidated Balance Sheets (Parentheticals) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Loans, allowance for loan losses	$ 3,758	$ 3,636
Other real estate owned, valuation allowance	$ 797	$ 825
Common stock, par value (in dollars per share)	$ 5	$ 5
Common stock, authorized shares (in shares)	10,000,000	10,000,000
Common stock, shares issued (in shares)	5,775,597	5,760,735
Common stock, shares outstanding (in shares)	5,775,597	5,760,735
Common stock, restricted shares (in shares)	32,087	31,546

XML

Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Interest and dividend income:
Loans and fees on loans	$ 18,973	$ 17,711
Taxable investment securities	1,031	837
Nontaxable investment securities	308	388
Dividends on restricted stock	132	131
Other interest income	225	107
Total interest and dividend income	20,669	19,174
Interest expense:
Deposits	2,282	2,216
Subordinated notes	537	536
Other borrowed funds	227	266
Total interest expense	3,046	3,018
Net interest income	17,623	16,156
Provision for loan losses	1,142	1,082
Net interest income after provision for loan losses	16,481	15,074
Noninterest income:
Service charges on deposit accounts	544	669
ATM and interchange income	837	670
Mortgage banking	959	854
Gains on sales of investment securities, net	69	257
Other income	874	651
Total noninterest income	3,283	3,101
Noninterest expense:
Salaries and employee benefits	8,098	6,981
Occupancy and equipment expense	1,650	1,650
Data processing expense	1,314	1,129
ATM maintenance expense	197	228
Advertising and marketing expense	537	480
Professional fees	588	494
Bank franchise taxes	399	366
FDIC insurance expense	248	306
Losses on sales and writedowns of other real estate owned, net	581	495
Other real estate owned expense	106	97
Directors’ fees	410	411
Other expense	1,839	1,517
Total noninterest expense	15,967	14,154
Net income before income taxes	3,797	4,021
Income tax expense	1,228	1,440
Net income	2,569	2,581
Less net income attributable to non-controlling interest	73	62
Net income attributable to HomeTown Bankshares Corporation	2,496	2,519
Effective dividends on preferred stock		408
Net income available to common stockholders	$ 2,496	$ 2,111
Basic earnings per common share (in dollars per share)	$ 0.43	$ 0.45	[1]
Diluted earnings per common share (in dollars per share)	$ 0.43	$ 0.37	[1]
Weighted average common shares outstanding (in shares)	5,769,752	4,652,853	[1]
Diluted weighted average common shares outstanding (in shares)	5,804,382	5,776,292	[1]

[1] Restated for the 4% stock dividend distributed July 11, 2016

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Net income	$ 2,569	$ 2,581
Other comprehensive loss:
Net unrealized holding losses on securities available for sale during the period	(25)	(428)
Deferred income tax benefit on unrealized holding losses on securities available for sale	9	146
Reclassification adjustment for gains on sales of investment securities included in net income	(69)	(257)
Tax expense related to realized gains on securities sold	24	87
Total other comprehensive loss	(61)	(452)
Comprehensive income	2,508	2,129
Less: comprehensive income attributable to the non-controlling interest	73	62
Comprehensive income attributable to HomeTown Bankshares Corporation	$ 2,435	$ 2,067

XML

Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Preferred Stock [Member] Series C Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2015	$ 12,893	$ 16,801	$ 15,484	$ 443	$ 396	$ 374	$ 46,391
Net income				2,519		62	2,581
Other comprehensive loss, net of tax					(452)		(452)
Net settlement of restricted stock vesting		(16)	(13)				(29)
Preferred stock dividend paid				(408)			(408)
Common stock dividend issued		665	637	(1,307)			(5)
Conversion of preferred stock to common stock	(12,893)	11,315	1,578
Stock based compensation			147				147
Balance at Dec. 31, 2016		28,765	17,833	1,247	(56)	436	48,225
Net income				2,496		73	2,569
Other comprehensive loss, net of tax					(61)		(61)
Net settlement of restricted stock vesting		(10)	(10)				(20)
Stock based compensation			148				148
Exercise of stock options		22	9				31
Reclassification of stranded tax effects from change in tax rate				24	(24)
Balance at Dec. 31, 2017		$ 28,777	$ 17,980	$ 3,767	$ (141)	$ 509	$ 50,892

XML

Consolidated Statements of Changes in Stockholders' Equity (Parentheticals) - Common Stock [Member] - shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Net settlement of restricted stock vesting (in shares)	9,821	8,519
Exercise of stock options (in shares)	4,500

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income	$ 2,569	$ 2,581
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	726	754
Provision for loan losses	1,142	1,082
Amortization of premium on securities, net	465	591
Amortization of discount on subordinated notes	30	30
Gains on sales of loans held for sale	(690)	(626)
Losses on sales and writedowns of other real estate owned, net	581	495
Gains on sales of investment securities	(69)	(257)
Net losses on fixed assets disposals		13
Increase in value of life insurance contracts	(200)	(184)
Stock compensation expense	148	147
Originations of loans held for sale	(33,611)	(25,897)
Proceeds from sales of loans held for sale	33,392	27,488
Changes in assets and liabilities:
Accrued income	(392)	(232)
Other assets	(53)	96
Deferred taxes, net	(123)	(56)
Accrued interest payable	(18)	14
Other liabilities	343	229
Net cash flows provided by operating activities	4,240	6,268
Cash flows from investing activities:
Net (increase) decrease in federal funds sold	(138)	1,287
Purchases of available for sale securities	(23,403)	(15,829)
Sales, maturities, and calls of available for sale securities	20,544	14,379
Redemptions (purchase) of restricted equity securities, net	(158)	322
Net increase in loans	(27,248)	(52,858)
Proceeds from sales of other real estate	988	1,429
Purchases of bank owned life insurance	(1,000)	(1,000)
Purchases of property and equipment	(292)	(130)
Net cash flows used in investing activities	(30,707)	(52,400)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	15,602	14,086
Net increase in interest-bearing deposits	10,870	37,216
Net increase (decrease) in FHLB borrowings	3,028	(14,000)
Net increase (decrease) in other borrowings	441	(1,244)
Exercise of stock options	31
Preferred stock dividend payment		(408)
Net settlement of vested restricted stock and cash in lieu of fractional shares	(20)	(34)
Net cash flows provided by financing activities	29,952	35,616
Net increase (decrease) in cash and cash equivalents	3,485	(10,516)
Cash and cash equivalents, beginning	18,229	28,745
Cash and cash equivalents, ending	21,714	18,229
Supplemental disclosure of cash flow information:
Cash payments for interest	3,064	2,974
Cash payments for income taxes	1,461	1,368
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans to other real estate owned	1,024	481
Change in unrealized gains and losses on available for sale securities	(94)	(685)
Conversion of preferred stock to common stock		$ 12,893

XML

Note 1 - Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]

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.

In

2013

the Bank formed a joint venture with another entity and now has a

49%

ownership interest in HomeTown Residential Mortgage, LLC. 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 Residential Mortgage LLC 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 a Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Summary of Significant Accounting Policies

The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of HomeTown Bankshares Corporation and its wholly-owned subsidiary HomeTown Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated

 balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the valuation of deferred tax assets. Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate (as applicable) is susceptible to changes in local market conditions.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and amounts due from correspondent banks. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated

 balance sheet caption “cash and due from banks.”

Securities

Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management

’s intent. Currently, all of the Company’s investment securities are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than

not

that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does

not

intend to sell the security and it is

not

likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is

no

credit loss, there is

no

other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company

’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Restricted Equity Securities

As members of the Federal Reserve Bank (FRB) and the Federal Ho

me Loan Bank (FHLB), the Bank is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.

Loans Held for Sale

Secondary market mortgage loans are designated as held for sale at the time of their origination.

  These loans are pre-sold with servicing released and the Company does

not

retain any interest after the loans are sold.  These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government sponsored enterprises (conforming loans).  In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk.  Loans held for sale are carried at fair value.  Gains and losses on sales of loans are recognized at the loan closing date and are included in noninterest income.  

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management

’s opinion, the borrower

may

be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past-due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.

● Residential real estate construction loans carry risks that the home will not be finished according to schedule, will not be finished according to the budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

● Land acquisition and development loans and commercial construction loans carry risks that the project will not be finished according to schedule, will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer, in the case of land acquisition and development loans, or the general contractor, in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.

● Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

● Commercial, industrial and agricultural loans carry risks associated with the successful operation of a business. Typically repayment is dependent on the cash flow of the business, and is secured by business assets, such as accounts receivable, equipment, and inventory. There is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.

● Equity lines of credit carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are

not

classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower

’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.

TDRs (Troubled Debt Restructurings) occur when the Company agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower

’s payment history, past-due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are

no

other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and

may

be returned to accrual status based on a record of making payments as scheduled for a period of

six

consecutive months.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are charged off when they become

120

days past due. Non-consumer loans are charged off when the loan becomes

180

days past due unless the loan is well secured and in the process of collection.

Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current

one

is

not

on file. Appraisals are performed by independent

third

-party appraisers with relevant industry experience. Adjustments to the appraised value

may

be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are

not

impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:

● Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

● Special mention loans have a specific defined weakness in the borrower ’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

● Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Company ’s credit extension. The payment history for the loan may have been inconsistent, and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Company. There is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Company will be unable to collect all amounts due.

● Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification and are considered impaired.

● Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

● Loss rated loans are not considered collectible under normal circumstances, and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Loan Fees and Costs

Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan

’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Property and Equipment

Land is carried at cost. Buildings, equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Estimated useful lives range from

ten

to

forty

years for buildings and leasehold improvements, and from

three

to

ten

years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance are included in the income statement in the line “Losses on sales and writedowns of other real estate owned, net.”

Bank Owned Life Insurance

The Company purchased

seven

life insurance policies on certain key executives. These policies are recorded at their cash surrender value. Increases in the cash surrender value of the life insurance contracts are included in noninterest income in the consolidated income statement caption “other income.”

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (

1

) the assets have been isolated from the Company, (

2

) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (

3

) the Company does

not

maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Advertising Expense

The Company expenses advertising and marketing costs as they are incurred.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than

not

that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are

not

offset or aggregated with other positions. Tax positions that meet the more-likely-than-

not

recognition threshold are measured as the largest amount of tax benefit that is more than

50

percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes

 in the consolidated statement of income. There are

no

unrecognized tax benefits as of

December 31, 2017

and

2016.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. Potential common shares that

may

be issued by the Company relate to the outstanding stock options. The remaining convertible preferred stock outstanding was converted to common shares on

June 29, 2016.

The preferred stock was convertible into shares of common stock of the Company based on a conversion price of

$6.25

per share, subject to adjustment for stock splits and dividends. The potential dilutive effect of the outstanding stock options is determined using the treasury stock method.

Comprehensive Income

Comprehensive income

 reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense. These changes for the Company relate solely to unrealized gains and losses on securities available for sale.

In

February 2018,

the FASB issued ASU

2018

-

02,

“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”).” The Company early adopted this new standard in the current year. ASU

2018

-

02

requires reclassification from AOCI to retained earnings for stranded tax effects resulting from the impact of the newly enacted federal income tax rate on items included in AOCI. The amount of this reclassification in

2017

was

$24

thousand.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are

no

quoted prices for the Company

’s various financial instruments. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates

may

not

be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is,

not

a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques

may

be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Stock-Based Compensation Plan

The

2005

Stock Option Plan was approved by stockholders on

April 20, 2006,

which authorized

550,000

shares of common stock to be used in the granting of incentive options to employees and directors. This

 plan expired in

2016.

Under the plan, the option price could

not

be less than the fair market value of the stock on the date granted. An option’s maximum term was

ten

years from the date of grant. Options granted under the plan were subject to a vesting schedule.

The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost was 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.

In

2009,

the Board of Directors authorized

137,280

(adjusted for

4%

stock dividend in

2016

) 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. Compensation is accounted for using the fair market value of the Company

’s common stock on the date the restricted shares are awarded.

Recent Accounting Pronouncements

In

January 2016,

the FASB issued ASU

2016

-

01,

“Financial Instruments

– Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU

2016

-

01,

among other things:

1

) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

2

) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

3

) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).

4

) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after

December 15, 2017,

including interim periods within those fiscal years. The Company is currently assessing the impact that ASU

2016

-

01

will have on its consolidated financial statements.

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

“Leases (Topic

842

).” Among other things, in the amendments in ASU

2016

-

02,

lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (

1

) A lease liability, which is a lessee

‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (

2

) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. The Company does

not

expect the adoption of ASU

2016

-

02

to have a material impact on its consolidated financial statements.

In

March 2016,

the FASB issued ASU

No.

2016

-

07,

“Investments - Equity Method and Joint Ventures (Topic

323

): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor

’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting,

no

retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2016.

The amendments were required to be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of ASU

2016

-

07

did

not

have a material impact on the Company’s consolidated financial statements.

In

 

June 2016,

the FASB issued ASU

No.

2016

-

13,

“Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

For public companies that are

not

SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2020.

The Bank has formed a committee to address the compliance requirements, data gathering, archiving and analysis efforts.  The Bank plans to begin tracking data during the

2

nd

quarter of

2018

and will reassess its position during the

4

th

quarter of

2018.

  Additionally, the Bank has begun to analyze various software solutions that will assist in complying with this Standard.

In

 

August 2016,

the FASB issued ASU

No.

2016

-

15,

“Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does

not

expect the adoption of ASU

2016

-

15

to have a material impact on its consolidated financial statements.

In

 

January 2017,

the FASB issued ASU

No.

2017

-

01,

“Business Combinations (Topic

805

): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic

805,

there are

three

elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are

not

required to be present. In addition, all the inputs and processes that a seller uses in operating a set are

not

required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is

not

a business. If the screen is

not

met, the amendments (

1

) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (

2

) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after

December 15, 2017,

including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date.

No

disclosures are required at transition. The Company does

not

expect the adoption of ASU

2017

-

01

to have a material impact on its consolidated financial statements.

During

March 2017,

the FASB issued ASU

2017

‐

08,

“Receivables—Nonrefundable Fees and Other Costs (Subtopic

310‐

20

), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU

2017‐

08

will have on its consolidated financial statements.

During

May 2017,

the FASB issued ASU

2017

‐

09,

“Compensation – Stock Compensation (Topic

718

): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic

718.

  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after

December 15, 2017.

Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have

not

yet been issued. The Company is currently assessing the impact that ASU

2017‐

09

 will have on its consolidated financial statements.

During

August 2017,

the FASB issued ASU

2017

-

12,

“Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after

December 15, 2018.

Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU

2017

-

12

will have on its consolidated financial statements.

XML

Note 2 - Investment Securities

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

Note

2.

Investment Securities

Amortized cost and fair value of securities available for sale are as follows:

(Dollars In Thousands)	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	13,475	$	61	$	(101	)	$	13,435
Mortgage-backed securities and CMO ’s		24,344		12		(375	)		23,981
Corporate securities		6,991		118		(42	)		7,067
Municipal securities		10,713		213		(65	)		10,861
	$	55,523	$	404	$	(583	)	$	55,344

(Dollars In Thousands)	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	12,422	$	118	$	(96	)	$	12,444
Mortgage-backed securities and CMO ’s		19,979		54		(265	)		19,768
Corporate securities		5,000		66		-			5,066
Municipal securities		15,659		266		(228	)		15,697
	$	53,060	$	504	$	(589	)	$	52,975

The primary purpose of the investment portfolio is to generate income, diversify earning assets, and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio is made up primarily of fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to see if adjustments are needed. The primary concern in a loss situation is the credit quality of the business or entity behind the instrument. The primary cause of unrealized losses is the increase in market interest rates over the yields available at the time the securities were purchased.

At

December 31, 2017

, the Company does

not

consider any security in an unrealized loss position to be other-than-temporarily impaired.

U.S. Government agency securities

.

The unrealized losses on

twenty-four

of the Company’s investments in obligations of the U.S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased.  The contractual terms of those investments do

not

permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does

not

consider those investments to be other-than-temporarily impaired at

December 31, 2017.

Mortgage-backed securities and CMO

’s

.

The unrealized losses on

thirty-five

of the Company’s investments in government-sponsored entity mortgage-backed securities were caused by increases in market interest rates over the yields available at the time the securities were purchased.  Because the decline in market value is attributable to changes in interest rates and

not

credit quality, the Company does

not

consider those investments to be other-than-temporarily impaired at

December 31, 2017.

Corporate securities

. The unrealized losses on

two

of the Company’s investments in corporate securities were caused by increases in market interest rates over the yield available at the time the security was purchased. Because the decline in market value is attributable to changes in interest rates and

not

credit quality, the Company does

not

consider this investment to be other-than-temporarily impaired at

December 31, 2017.

Municipal securities

.

The unrealized losses on

six

of the Company’s investments in obligations of municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates and credit spreads, and

not

credit quality, the Company does

not

consider those investments to be other-than-temporarily impaired at

December 31, 2017.

The following tables demonstrate the unrealized loss position of securities available for sale at

December

31,

2017

and

2016.

	December 31, 2017
	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	$	6,859	$	(44	)	$	2,995	$	(57	)	$	9,854	$	(101	)
Mortgage-backed securities and CMO ’s		15,624		(192	)		7,386		(183	)		23,010		(375	)
Corporate securities		1,438		(42	)		-		-			1,438		(42	)
Municipal securities		453		(3	)		2,332		(62	)		2,785		(65	)
	$	24,374	$	(281	)	$	12,713	$	(302	)	$	37,087	$	(583	)

	December 31, 2016
	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	$	3,492	$	(32	)	$	3,491	$	(64	)	$	6,983	$	(96	)
Mortgage-backed securities and CMO ’s		14,232		(235	)		1,474		(30	)		15,706		(265	)
Corporate Securities		500		(-	)		-		(-	)		500		(-	)
Municipal securities		6,967		(223	)		262		(5	)		7,229		(228	)
	$	25,191	$	(490	)	$	5,227	$	(99	)	$	30,418	$	(589	)

The amortized cost and estimated fair value of

securities at

December 31, 2017,

by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers

may

have the right to prepay obligations with or without call or prepayment penalties.

(Dollars In Thousands)	Amortized Cost		Fair Value
Less than one year	$	245	$	245
Over one through five years		2,963		2,942
Over five through ten years		15,725		15,811
Greater than 10 years		36,590		36,346
	$	55,523	$	55,344

Proceeds from the sales, maturities and calls of secur

ities available for sale in

2017

and

2016

were

$20.5

million and

$14.4

million, respectively. The Company realized

$69

thousand in net gains on sales of

forty-five

available for sale securities in

2017,

compared to

$257

thousand from the sales of

fourteen

securities in the prior year.  The net gain in

2017

included gross gains of

$170

thousand net of gross losses of

$101

thousand. The prior year included gross gains of

$262

thousand and gross losses of

$5

thousand. Total pledged securities had a fair market value of

$4.0

million at

December 31, 2017

and

$6.2

million at

December 31, 2016.

At

December 31, 2017,

securities having a fair market value of

$2.3

million were pledged to secure public deposits, securities pledged to secure Federal Home Loan Bank borrowings totaled

$112

thousand, and

$1.6

million in securities were pledged for other purposes.

XML

Note 3 - Loans Receivable

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables, Excluding Allowance for Credit Losses [Text Block]

Note

3.

Loans Receivable

The major classifications of loans in the consolidated balance shee

ts at

December 31, 2017

and

2016

were as follows:

(Dollars In Thousands)	December 31,
	2017			2016
Construction:
Residential	$	15,221		$	10,204
Land a cquisition, development & commercial		35,601			27,480
Real Estate:
Residential		121,649			111,626
Commercial		173,999			172,248
Commercial, industrial & agricultural		61,129			59,702
Equity lines		28,835			29,956
Consumer		7,693			7,668
Overdrafts		68			107
Total loans		444,195			418,991
Less allowance for loan losses		(3,758	)		(3,636	)
Loans, net	$	440,437		$	415,355

The past-due and nonaccrual status of loans as of

December 31, 2017

was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	–	$	–	$	–	$	–	$	15,221	$	15,221	$	–
Land acquisition, development & commercial		43		–		274		317		35,284		35,601		274
Real Estate:
Residential		589		870		546		2,005		119,644		121,649		173
Commercial		278		19		209		506		173,493		173,999		209
Commercial, industrial & agricultural		130		143		392		665		60,532		61,197		403
Equity lines		544		49		–		593		28,242		28,835		49
Consumer		17		2		36		55		7,638		7,693		36
Total	$	1,601	$	1,083	$	1,457	$	4,141	$	440,054	$	444,195	$	1,144

The past-due and nonaccrual status

of loans as of

December 31, 2016

was as follows:

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	−	$	−	$	−	$	−	$	10,204	$	10,204	$	−
Land acquisition, development & commercial		−		−		−		−		27,480		27,480		−
Real Estate:
Residential		672		193		577		1,442		110,184		111,626		577
Commercial		115		−		−		115		172,133		172,248		336
Commercial, industrial & agricultural		60		33		−		93		59,716		59,809		11
Equity lines		258		−		−		258		29,698		29,956		−
Consumer		8		6		4		18		7,650		7,668		−
Total	$	1,113	$	232	$	581	$	1,926	$	417,065	$	418,991	$	924

There w

as

one

loan, totaling

$373

thousand that was past due

ninety

days or more and still accruing interest at

December 31, 2017.

There were

two

residential real estate loans totaling

$4

thousand that were past due

ninety

days or more and still accruing interest at

December 31, 2016.

Impaired loans, which include TDRs of $

4.1

million, and the related allowance at

December 31, 2017,

were as follows:

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		181		331		–		331		10
Real Estate:
Residential		360		640		–		638		30
Commercial		4,098		4,273		–		4,166		161
Commercial, industrial & agricultural		379		379		–		379		15
Equity lines		299		299		–		300		14
Consumer		−		−		–		−		−
Total loans with no allowance	$	5,317	$	5,922	$	–	$	5,814	$	230

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		−		−		−		54		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	−	$	−	$	−	$	54	$	−

Impaired l

oans, which include TDRs of

$6.4

million, and the related allowance at

December 31, 2016,

were as follows:

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		−		−		–		−		−
Real Estate:
Residential		770		770		–		629		(11	)
Commercial		6,380		6,556		–		6,521		255
Commercial, industrial & agricultural		11		11		–		11		−
Equity lines		−		−		–		−		−
Consumer		−		−		–		−		−
Total loans with no allowance	$	7,161	$	7,337	$	–	$	7,161	$	244

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		115		115		17		122		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	115	$	115	$	17	$	122	$	−

Troubled Debt Restructurings

At

December 31, 2017,

four

loans totaling

$4.1

million were classified as troubled debt restructurings (“TDRs”). Two of the

four

loans totaling

$3.9

million were performing in accordance with their restructured terms and were

not

on nonaccrual status at year end

2017.

The other

two

loans from

one

borrower totaled

$219

thousand and were on nonaccrual status at year end

2017.

All

four

TDRs were current with their restructured terms at

December 31, 2017.

At

December 31, 2016,

five

loans totaling

$6.4

million were classified as troubled debt restructurings. Three of the

five

loans totaling

$6.2

million were performing in accordance with their restructured terms and were

not

on nonaccrual status at year end

2016.

The other

two

loans from

one

borrower totaled

$231

thousand and were on nonaccrual status at year end

2016.

All

five

TDRs were current with their restructured terms at

December 31, 2016.

There was

no

valuation allowance related to

total TDRs at

December 31, 2017

or

December 31, 2016.

No

loans were modified in a TDR during the year

s ended

December 31, 2017

or

December 31, 2016.

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company

’s allowance for loan losses.  When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent.  Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs

may

have already been taken against the loan and a specific allowance

may

have already been established for the loan.  As a result of any modification as a TDR, the specific reserve associated with the loan

may

be increased.  Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  As a result, any specific allowance

may

be increased, adjustments

may

be made in the allocation of the total allowance balance, or partial charge-offs

may

be taken to further write-down the carrying value of the loan.  Management exercises significant judgment in developing estimates for potential losses associated with TDRs.

XML

Note 4 - Allowance for Loan Losses

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Allowance for Credit Losses [Text Block]

 

Note

4.

Allowance for Loan Losses

The following table p

resents, as of

December 31, 2017,

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, 2017	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	$	63	$	−		$	−	$	31		$	94	$	−	$	94	$	15,221	$	−	$	15,221
Land acquisition, development & commercial		173		(150	)		−		288			311		−		311		35,601		181		35,420
Real estate:
Residential		866		(293	)		−		382			955		−		955		121,649		360		121,289
Commercial		1,516		(454	)		43		498			1,603		−		1,603		173,999		4,098		169,901
Commercial, industrial & agricultural		461		(80	)		−		60			441		−		441		61,197		379		60,818
Equity lines		338		−			−		(101	)		237		−		237		28,835		299		28,536
Consumer		97		(101	)		15		97			108		−		108		7,693		−		7,693
Unallocated		122		−			−		(113	)		9		−		9		−		−		−
Total	$	3,636	$	(1,078	)	$	58	$	1,142		$	3,758	$	−	$	3,758	$	444,195	$	5,317	$	438,878

The following table p

resents, as of

December 31, 2016,

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, 2016	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	$	83	$	−		$	−	$	(20	)	$	63	$	−	$	63	$	10,204	$	−	$	10,204
Land acquisition, development & commercial		187		(2	)		−		(12	)		173		−		173		27,480		−		27,480
Real estate:
Residential		1,047		(4	)		45		(222	)		866		−		866		111,626		770		110,856
Commercial		1,001		(606	)		−		1,121			1,516		17		1,499		172,248		6,495		165,753
Commercial, industrial & agricultural		531		(34	)		−		(36	)		461		−		461		59,809		11		59,798
Equity lines		277		(99	)		10		150			338		−		338		29,956		−		29,956
Consumer		85		(103	)		49		66			97		−		97		7,668		−		7,668
Unallocated		87		−			−		35			122		−		122		−		−		−
Total	$	3,298	$	(848	)	$	104	$	1,082		$	3,636	$	17	$	3,619	$	418,991	$	7,276	$	411,715

Loans by credit quality indicators as of

December 31, 2017

were as follows:

(Dollars in Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Doubtful Nonaccrual		Total
Construction loans:
Residential	$	15,221	$	−	$	−	$	−	$	−	$	15,221
Land acquisition, development & commercial		31,433		3,987		−		181		−		35,601
Real estate loans:
Residential		120,575		342		559		−		173		121,649
Commercial		165,760		7,386		644		209		−		173,999
Commercial, industrial, agricultural		59,042		1,249		503		379		24		61,197
Equity lines		28,536		−		299		−		−		28,835
Consumer		7,658		−		−		35		−		7,693
Total Loans	$	428,225	$	12,964	$	2,005	$	804	$	197	$	444,195

At

December 31, 2017

, the Company does

not

have any loans classified as Loss.

Loans by credit quality in

dicators as of

December 31, 2016

were as follows:

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,204	$	−	$	−	$	−	$	10,204
Land acquisition, development & commercial		27,480		−		−		−		27,480
Real estate loans:
Residential		110,856		−		193		577		111,626
Commercial		171,369		−		543		336		172,248
Commercial, industrial, agricultural		59,120		78		600		11		59,809
Equity lines		29,956		−		−		−		29,956
Consumer		7,668		−		−		−		7,668
Total Loans	$	416,653	$	78	$	1,336	$	924	$	418,991

At

December 31, 2016,

the Company did

not

have any loans classified as Doubtful or Loss.

XML

Note 5 - Other Real Estate Owned

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Real Estate Owned [Text Block]

Note

5.

Other Real Estate Owned

Changes in other

real estate owned for

2017

were as follows:

(Dollars i n Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	4,619		$	(825	)	$	3,794
Additions		1,024			—			1,024
Writedowns		—			(588	)		(588	)
Sales		(1,597	)		616			(981	)
Balance at the end of the year	$	4,046		$	(797	)	$	3,249

Changes in

other real estate owned for

2016

were as follows:

(Dollars i n Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	5,657		$	(420	)	$	5,237
Additions		481			—			481
Writedowns		—			(405	)		(405	)
Sales		(1,519	)		—			(1,519	)
Balance at the end of the year	$	4,619		$	(825	)	$	3,794

The major classifications of other real estate owned in the consolidated bal

ance sheets at

December 31, 2017

and

December 

31,

2016

were as follows:

(Dollars i n Thousands)	2017		2016
Residential lots	$	1,745	$	2,234
Residential development		-		423
Residential real estate		1,024		-
Commercial lots		90		90
Commercial buildings		390		1,047
Total Other Real Estate Owned	$	3,249	$	3,794

Other real estate owned related expenses in the consolidated statements of income for the years ended Decembe

r

31,

2017

and

December 

31,

2016

include:

(Dollars i n Thousands)	2017			2016
Net (gain)/loss on sales	$	(7	)	$	90
Provision for unrealized losses		588			405
Operating expenses		106			97
Total Other Real Estate Owned	$	687		$	592

XML

Note 6 - Property and Equipment

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

Note

6.

Property and Equipment

The major components of property an

d equipment at

December 31, 2017

and

2016

were as follows:

(Dollars i n Thousands)	2017		2016
Land	$	4,309	$	4,309
Buildings and improvements		8,617		8,617
Leasehold improvements		2,154		2,156
Furniture and equipment		2,314		3,214
Software		296		556
Construction in process		4		10
Property and equipment, total		17,694		18,862
Less accumulated depreciation and amortization		4,757		5,491
Property and equipment, net	$	12,937	$	13,371

Depreciation and amortization ex

pense was

$726

thousand and

$754

thousand for the years ended

December 31, 2017

and

2016,

respectively.

Leases

The Company currently leases its main office under a non-cancelable lease agreement. The lease has a

ten

-year term and expires on

December 31, 2025.

The agreement provides an option to extend the lease for

one

additional

ten

-year term at expiration. Terms of the new agreement provide for an annual rental increase, beginning

January 1, 2017,

based on a published inflation index,

not

to exceed

three

percent over the rent for the immediately preceding lease year. The Company currently leases a branch location under a non-cancelable lease agreement. The original lease expired on

July 31, 2016.

The lease was renewed for

one

additional term of

ten

years and it provides an option to extend the lease for

two

additional, consecutive

five

-year terms. The newly negotiated lease expires

July 31, 2026.

The Company currently leases space to operate an automated teller machine under a non-cancelable lease agreement. The term of the

eight

year lease commenced on

April 1, 2013

and expires on

April 1, 2021.

The lease provides an option to extend the term for

two

additional

five

-year periods. Terms of the agreement provide for an annual rental increase of

three

percent over the rent for the immediately preceding lease year.

HomeTown Residential Mortgage, LLC leases space in Roanoke and Christiansburg for its mortgage operations. Both leases are for a term of

twelve

months and renew under the same terms unless

60

days’ notice is provided by the lessor or the Company. The Roanoke lease expires every

May 31

and the Christiansburg lease expires every

September 30.

The current minimum annual lease payments under non-cancelable lease

s in effect at

December 31, 2017

were as follows:

(Dollars In Thousands)	2017
2018	$	288
2019		274
2020		274
2021		268
2022		270
Thereafter		875
Total	$	2,249

Rent expense for t

he years ended

December 31, 2017

and

2016

was

$304

thousand and

$307

thousand, respectively, and is included in occupancy and equipment expense on the Company’s consolidated statements of income.

XML

Note 7 - Deposits

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Deposit Liabilities Disclosures [Text Block]

Note

7.

Deposits

The aggregate amount of time deposits

in denominations of over

$250,000

at

December 31, 2017

and

2016

were

$8.3

million and

$9.8

million, respectively.

At

December 31, 2017,

the scheduled maturities of time deposits are as follows:

(Dollars In Thousands)	2017
2018	$	76,524
2019		27,215
2020		14,492
2021		6,355
2022 and thereafter		6,878
Total	$	131,464

The Company obtains certain deposits through the efforts of

third

-party deposit

brokers. At

December 31, 2017

and

2016,

brokered deposits totaled

$33.1

million and

$28.5

million, respectively, and were included in interest-bearing deposits on the consolidated balance sheets. There were

no

deposit relationships over

5%

of total deposits at the end of

2017.

XML

Note 8 - Federal Home Loan Bank Borrowings

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Federal Home Loan Bank Advances, Disclosure [Text Block]

Note

8.

Federal Home Loan Bank Borrowings

The Company has outstanding debt with the Federal Home Loan Ban

k of Atlanta in the amount of

$11.0

million and

$8.0

million as of

December 31, 2017

and

2016,

respectively. The Federal Home Loan Bank debt at

December 31, 2017

is comprised of

five

fixed rate advances totaling

$11.0

million.

At

December 31, 2017

and

2016

, borrowings from the Federal Home Loan Bank of Atlanta were as follows:

(Dollars In Thousands)
Advance Date	Maturity Date	Conversion Date	Current Rate	2017		2016
January 14, 2015	January 16, 2018	Quarterly	1.090%	$	4,000	$	4,000
August 19, 2016	August 20, 2018	Quarterly	2.535%		4,000		4,000
January 3, 2017	January 3, 2020	N/A	1.500%		695		-
February 3, 2017	February 3, 2020	N/A	1.490%		722		-
May 3, 2017	May 4, 2010	N/A	1.580%		1,611		-
				$	11,028	$	8,000

The Company had collateral pledged on these

borrowings at

December 31, 2017,

including real estate loans totaling

$21.4

million, investment securities totaling

$103

thousand, and Federal Home Loan Bank stock with a book value of

$967

thousand.

XML

Note 9 - Subordinated Notes

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Subordinated Borrowings Disclosure [Text Block]

Note

9.

Subordinated Notes

On

December 18, 2015,

the Company completed the issuance of

$7.5

million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various institutional accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of

December 30, 2025

and have an annual fixed interest rate of

6.75%

until

December 30, 2020.

Thereafter, the notes will have a floating interest rate based on LIBOR. Interest will be paid semi-annually, in arrears, on

June 30

and

December 30

of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on

March 30,

June 30,

September 30

and

December 30

throughout the floating interest rate period or earlier redemption date.

(Dollars in Thousands)
As of December 31, 201 7	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	246	$	7,254

(Dollars in Thousands)
As of December 31, 2016	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	276	$	7,224

For the years ended

December

31,

2017

and

2016,

the average effective interest rate was

7.41%

and

7.44%,

respectively.

The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company

’s payments to general and secured creditors and depositors of its wholly owned subsidiary, HomeTown Bank.

The notes are redeemable, without penalty, on or after

December 30, 2020

and, in certain limited circumstances, prior to that date.

The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is

not

“well capitalized” for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

XML

Note 10 - Other Borrowings

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Short-term Debt [Text Block]

Note

10.

Other Borrowings

Other borrowings consist of the followi

ng at

December 31, 2017

and

2016:

(Dollars In Thousands)	2017			2016
Securities sold under agreements to repurchase	$	-		$	452
Warehouse line of credit		1,558			665
	$	1,558		$	1,117
Weighted average interest rate at December 31		4.11	%		2.07	%

Securities sold under agreements to repurchase are secured transactions with customers and generally mature the day following the day sold. Short-term borrowings

may

also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions. 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 amount borrowed on the

$5.0

million warehouse line of

credit was

$1.6

million at year end

2017

at a rate of LIBOR plus

2.75%.

The Company had

$36.5

million of federal funds lines of credit available at year-end

2017.

In addition, the Company had access to a

$10.0

million credit line through Promontory’s Insured Cash Sweep (ICS)

one

way buy program at a rate of the

one

month LIBOR plus

11

basis points but

not

less than

20

basis points. At

December 31, 2017

and

2016,

there were

no

advances on the federal funds or credit lines.

XML

Note 11 - Fair Value Measurements

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note

11.

Fair Value Measurements

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company

’s market assumptions. The

three

levels of the fair value hierarchy based on these

two

types of inputs are as follows:

Level

1

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

Level

2

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

Level

3

- Valuation is based on model-based techniques that use

one

or more significant inputs or assumptions that are unobservable in the market.

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

Securities available for sale:

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level

1

). If quoted market prices are

not

available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and

may

determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level

2

).

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis

as of

December 31, 2017

and

2016:

(Dollars in Thousands)			Car rying value at December 31, 2017
Description	Balance as of December 31, 2017		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	$	13,435	$	–	$	13,435	$	–
Mortgage-backed securities and CMO ’s		23,981		–		23,981		–
Corporate securities		7,067		–		7,067		–
Municipal securities		10,861		–		10,861		–

(Dollars in Thousands)			Car rying value at December 31, 2016
Description	Balance as of December 31, 2016		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	$	12,444	$	–	$	12,444	$	–
Mortgage-backed securities and CMO ’s		19,768		–		19,768		–
Corporate securities		5,066		–		5,066		–
Municipal securities		15,697		–		15,697		–

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.

The following table summarizes the Company

’s assets that were measured at fair value on a nonrecurring basis as of

December 31, 2017

and

2016.

(Dollars i n Thousands)			Car rying value at December 31, 2017
Description	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale	$	1,587	$	–	$	1,587	$	–
Other real estate owned		3,249		–		–		3,249

(Dollars i n Thousands)			Carrying value at Decem ber 31, 2016
Description	Balance as of December 31, 2016		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	$	98	$	–	$	–	$	98
Loans held for sale		678		–		678		–
Other real estate owned		3,794		–		–		3,794

At

December 31, 2017

and

December 

31,

2016,

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 Me

asurements for

December 31, 2017:

(Dollars i n Thousands)	Quantitative information about Level 3 Fair Value Me asurements for December 31, 2017
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Other real estate owned	$	2,254	Discounted appraised value	Selling cost	6	%	-	10	%	(8%	)
				Discount for lack of marketability and age of appraisal	0	%	-	43	%	(7%	)
	$	995	Internal evaluations	Internal evaluations	19	%	-	19	%	(19%	)

The following table displays quantitative information about Level

3

Fair Value Me

asurements for

December 31, 2016:

(Dollars i n Thousands)	Quantitative information about Level 3 Fair Value Me asurements for December 31, 2016
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	98	Discounted appraised value	Residual cash flows discount rate	6	%	-	6	%	(6%	)
Other real estate owned	$	1,560	Discounted appraised value	Selling cost	6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal	4	%	-	12	%	(10%	)
	$	2,234	Internal evaluations	Internal evaluations	4	%	-	54	%	(24%	)

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.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within

one

to

three

days. Management believes the carrying value of federal funds sold approximates estimated market value.

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 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.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within

30

days approximate their fair values.

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.

Subordinated notes: The fair values is 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

).

Accrued interest: The carrying amount of accrued interest receivable and payable approximates fair value.

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At

December 31,

201

7

and

2016,

the fair value of loan commitments and standby letters of credit was deemed to be immaterial.

The carrying amounts and approximate fair values of the Company's financial instruments are

as follows at

December 31, 2017:

(Dollars i n Thousands)			Fair value at December 31, 2017
Description	Carrying value as of December 31, 2017		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	$	21,714	$	21,714	$	–	$	–	$	21,714
Federal funds sold		180		180		–		–		180
Securities available for sale		55,344		–		55,344		–		55,344
Restricted equity securities		2,371		–		2,371		–		2,371
Loans held for sale		1,587		–		1,587		–		1,587
Loans, net		440,437		–		–		438,449		438,449
Bank owned life insurance		8,669		–		8,669		–		8,669
Accrued income		2,681		–		2,681		–		2,681
Financial liabilities
Total deposits		477,320		–		477,599		–		477,599
FHLB borrowings		11,028		–		11,150		–		11,150
Subordinated notes		7,254		–		7,890		–		7,890
Other borrowings		1,558		–		1,558		–		1,558
Accrued interest payable		368		–		368		–		368

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at

December 31, 2016:

(Dollars In Thousands)			Fair value at December 31, 2016
Description	Carrying value as of December 31, 2016		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	$	18,229	$	17,479	$	760	$	–	$	18,239
Federal funds sold		42		42		–		–		42
Securities available for sale		52,975		–		52,975		–		52,975
Restricted equity securities		2,213		–		2,213		–		2,213
Loans held for sale		678		–		678		–		678
Loans, net		415,355		–		–		415,039		415,039
Bank owned life insurance		7,469		–		7,469		–		7,469
Accrued income		2,289		–		2,289		–		2,289
Financial liabilities
Total deposits		450,848		–		451,385		–		451,385
FHLB borrowings		8,000		–		8,031		–		8,031
Subordinated notes		7,224		–		8,012		–		8,012
Other borrowings		1,117		–		1,117		–		1,117
Accrued interest payable		386		–		386		–		386

XML

Note 12 - Earnings Per Common Share

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

Note

12.

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 year

s ended

December 31, 2017

and

2016,

as all of the Series C Preferred Stock was converted to common stock during

2016.

	For the Years Ended December 31,
	2017						2016
Dollars in Thousands, except share and per share data	Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount		Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		5,769,752	$	2,496	$	0.43		4,652,853	$	2,111	$	0.45
Effect of dilutive securities:
Convertible preferred stock		−		−		−		1,112,970		−		(0.08	)
Dilutive stock options		34,630		−		−		10,469		−		−
Earnings per common share, diluted		5,804,382	$	2,496	$	0.43		5,776,292	$	2,111	$	0.37

At

December 31, 2017

and

2016

, the number of stock options considered antidilutive and excluded from the calculation of diluted weighted average shares was

38,500

and

190,531,

respectively. Non-vested 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 dividends during the vesting period.

XML

Note 13 - Stock Based Compensation

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note

13.

Stock Based Compensation

The Company recorded stock ba

sed compensation expense of

$148

thousand and

$147

thousand for the years ended

December 31, 2017

and

2016,

respectively.

The

2005

Stock Option Plan (the Plan) pursuant to which the Board of Directors granted stock options to directors, officers and employees expired in

2016,

thus there are

no

options available for future i

ssuance. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost was measured at the grant date based on the fair value of the award and was and continues to be recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. 

The Company used the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards

 was affected by the price of the Company's stock and a number of financial assumptions and variables. These variables included the risk-free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. 

No

stock options were granted during

2017

or

2016.

Compensation expense is charged to income ratably over the vesting period and was

$71

thousand in

2017

and

$75

thousand in

2016.

As of

December 31, 2017,

there was

$140

thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next

two

years.  At the discretion of the Board of Directors, the stock option plan was

not

modified for the

4%

stock dividend distributed on

July 11, 2016

A summary of option activity under the

2005

stock option plan during the year ended

December 31

,

2017

is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2016		201,000		$	7.80
Granted		–			–
Exercised		(4,500	)		6.90
Expired		(9,500	)		8.69
Forfeited		–			–
Balance at December 31, 2017		187,000		$	7.78	$	641,131		5.62
Exercisable at December 31, 2017		125,800		$	8.21	$	379,568		4.96

(

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 th

eir options on

December 31, 2017.

In

2009,

the Board of Directors authorized

137,280

shares, restated for the

4%

stock dividend distributed

July 11, 2016,

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

$77

thousand in

2017

and

$72

thousand in

2016.

Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The weighted-average grant date fair value of restricted stock granted in

2017

was

$10.24

compared to

$9.09*

in

2016.

  The Company granted

13,258

and

11,149*

shares of restricted stock under the plan in

2017

and

2016,

respectively.

As of

December 31, 2017

, there was

$216

thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through

2022.

A summary of the activity for restricted stock awards for the periods indicated is presented below:

	2017					2016
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		31,546		$	7.03		39,352	*	$	6.00	*
Granted		13,258			10.24		11,149	*		9.09	*
Vested		(11,920	)		6.18		(12,167	) *		5.63	*
Forfeited		(797	)		8.37		(6,788	) *		6.99	*
Nonvested at the end of the period		32,087		$	8.63		31,546	*	$	7.03	*

* Restated for the

4%

stock dividend distributed

July 11, 2016.

XML

Note 14 - Salary Continuation Plan

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Salary Continuation Plan [Text Block]

Note

14.

Salary Continuation Plan

The Company has a Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income. The Supplemental Executive Retirement Plan (the “SERP”) provides lifetime payments equal to

20%

of a participant

’s average annual base salary for the

five

years immediately prior to retirement. There is an incentive formula with an additional benefit of

20%

of a participant’s average annual base salary for the

five

years immediately prior to retirement if performance targets set by the Board of Directors are met. The SERP contains provisions for disability and survivor benefits, a benefits vesting schedule based on age attained and automatic full vesting in the event of a change in control of the Company. During

2016,

the SERP was increased to provide for the individual who filled the position of Chief Financial Officer (CFO), upon the former CFO’s retirement. Accrued deferred compensation expense under the SERP, included in other liabilities, totaled

$1.0

million and

$666

thousand at the end of

2017

and

2016,

respectively. Compensation expense related to the SERP was

$357

thousand for

2017

compared to

$351

thousand for

2016.

The funding mechanism for the plan is Bank Owned Life Insurance policies on the lives of the participants.

XML

Note 15 - Employee Benefit Plan

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

Note

15.

Employee Benefit Plan

The Company adopted a profit sharing plan pursuant to Section

401

(k) of the Internal Revenue Code. The plan covers substantially all employees. Participants

may

contribute a percentage of compensation, subject to a maximum allowed under the Code. The Company makes non-discretionary matching contributions of

100%

of the employee

’s deferral up to

3%

of compensation and matches

50%

of the employee’s next

3%

deferral. In addition, the Company

may

make additional contributions at the discretion of the Board of Directors. The Company’s matching contributions were

$263

thousand and

$240

thousand for the years ended

December 31, 2017

and

2016,

respectively.

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Note 16 - Income Taxes

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

16.

Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is

no

longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to

201

4.

The current and deferred components of income tax expense for the periods ended

December 31,

201

7

and

2016

are as follows:

(Dollars In Thousands)	201 7			201 6
Current	$	1,351		$	1,496
Deferred		(123	)		(56	)
Income tax expense	$	1,228		$	1,440

Income tax expense for

2017

includes a downward adjustment of net deferred tax assets in the amount of

$100

thousand, recorded as a result of the enactment of

H.R.1

Tax Cuts and Jobs Act on

December 22, 2017.

The Act reduced the corporate Federal tax rate from

34%

to

21%

effective

January 1, 2018

Rate Reconciliation

Total income tax expense differed from the “expected” amount computed by applying the U.S. Federal income tax rate of

34

percent to income before income taxes as a result of the following.

(Dollars In Thousands)	2017			2016
Tax at statutory federal rate	$	1,291		$	1,367
Tax-exempt interest income		(116	)		(201	)
Cash surrender value of life insurance		(68	)		(63	)
Incentive stock options		24			261
Tax impact from enacted change in tax rate		100			–
Other		(3	)		76
Income tax expense	$	1,228		$	1,440

Deferred Income Tax Analysis

The significant components of net deferred taxes at

December 31,

201

7

and

2016

are summarized as follows:

(Dollars In Thousands)	201 7		201 6
Deferred tax assets
Pre-opening expenses	$	28	$	62
Allowance for loan losses		528		693
Deferred compensation		215		226
Other real estate expenses		187		280
Unrealized loss on securities available for sale		38		29
Nonaccrual loan interest		9		17
Other		17		21
Deferred tax asset		1,022		1,328
Deferred tax liabilities
Property and equipment		230		305
Deferred loan fees		613		980
Other		17		13
Deferred tax liability		860		1,298
Net deferred tax asset	$	162	$	30

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Note 17 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

17.

Commitments and Contingencies

Litigation

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.

Credit Related Financial Instruments

The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheet.

The Company

’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary of the Company

’s commitments at

December 31, 2017

and

2016

is as follows (dollars in thousands):

(Dollars In Thousands)	201 7		201 6
Commitments to extend credit	$	109,285	$	102,277
Standby letters of credit		6,711		4,255

Commitments to extend credit are agreements to lend to a customer as long as there is

no

violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and

may

require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do

not

necessarily represent future cash requirements. The Company evaluates each customer

’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but

may

include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a

third

party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

The Company is required to maintain certain required reserve balances with the Federal Re

serve Bank. At

December 31, 2017

and

2016,

these reserve balances amounted to

$9.6

million and

$6.6

million, respectively.

The Company from time to time

may

have cash and cash equivalents on deposit with financial institutions that exceed federally insured limits. Balances in excess of F

DIC insured amounts totaled

$5.9

million and

$7.2

million at

December 31, 2017

and

2016,

respectively.

Purchase Obligation

O

n

November 1, 2015,

the Company entered into a

three

year marketing agreement involving naming, advertising, and sponsorship rights. This agreement was replaced with a new agreement effective

July 1, 2016.

The new term was for

three

years, with options for a

fourth

and

fifth

year, and expanded the exclusivity of marketing rights and increased signage. In relation to these agreements, the Company expensed

$55.0

thousand and

$57.5

thousand in

2017

and

2016,

respectively. The agreement obligates the Company to pay

$65.0

thousand in

2018

and

$32.5

thousand for the

first

half of

2019

for these rights.

XML

Note 18 - Regulatory Restrictions

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Regulatory Capital Requirements under Banking Regulations [Text Block]

Note

18.

Regulatory Restrictions

Dividends

The Company, as a Virginia banking corporation,

may

pay dividends only out of its retained earnings. However, regulatory authorities

may

limit payment of dividends by any company when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Company. At De

cember

31,

2017,

there was

$3.8

million in retained earnings available from which to pay dividends to common stockholders.

No

cash dividends were paid to common stockholders in

2017

or

2016.

A stock dividend was distributed in

2016

and is discussed in Note

20

Capital Transactions.

Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision

’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on

January 1, 2015

with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in

January 1, 2019.

As part of the new requirements, the Common Equity Tier

1

Capital is calculated and utilized in the assessment of capital for all institutions. The net unrealized gain or loss on available for sale securities is

not

included in computing regulatory capital.

Prompt corrective action regulations provide

five

classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are

not

used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plan

s are required. At year end

2017

and

2016,

the most recent regulatory notifications categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are

no

conditions or events since that notification that management believes have changed the institution’s category.

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 make 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 new rules introduced 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 final new capital rules required the Company to comply with the following new minimum capital ratios (including the capital conservation bu

ffer), effective

January 1, 2017

and

2016,

respectively: (

1

) a new common equity Tier

1

capital ratio of

5.75%

and

5.125%

of risk-weighted assets; (

2

) a Tier

1

capital ratio of

7.25%

and

6.625%

of risk-weighted assets; (

3

) a total capital ratio of

9.25%

and

8.625%

of risk-weighted assets; and (

4

) a leverage ratio of

4%

of total assets. 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I common equity, and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the applicable regu

lations. As of

December 31, 2017,

management believes the Bank met all capital adequacy requirements to which it was subject.

The Bank

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

HomeTown Bank December 31, 2017	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)	$	61,257		12.48	%	$	45,403		9.25	%	$	49,084		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		57,474		11.71	%		28,222		5.75	%		31,903		6.50	%
Tier I Capital (to Risk-Weighted Assets)		57,499		11.72	%		35,569		7.25	%		39,248		8.00	%
Tier I Capital (to Average Assets)		57,499		10.39	%		22,136		4.00	%		27,670		5.00	%

HomeTown Bank December 31, 2016	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) %	$	58,436		12.59	%	$	40,045		8.625	%	$	46,429		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		54,783		11.80	%		23,795		5.125	%		30,179		6.50	%
Tier I Capital (to Risk-Weighted Assets)		54,800		11.80	%		30,759		6.625	%		37,143		8.00	%
Tier I Capital (to Average Assets)		54,800		10.67	%		20,537		4.00	%		25,671		5.00	%

XML

Note 19 - Transactions With Related Parties

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

Note

19.

Transactions with Related Parties

The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did

not,

in the opinion of management, involve more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:

(Dollars In Thousands)	2017			2016
Balance, beginning	$	8,194		$	7,124
New loans		392			5,261
Repayments		(4,637	)		(4,191	)
Balance, ending	$	3,949		$	8,194

Repayments of loans to related parties include

$575

thousand in loans removed from related party disclosure due to a change in directorship in

2016.

Aggregate deposit balances with related parties at

Dec

ember

31,

2017

and

2016

were

$12.5

million and

$16.7

million, respectively.

XML

Note 20 - Capital Transactions

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

Note

20.

Capital Transactions

The Board of Directors declared a

4%

common stock dividend on

May 10, 2016

to holders of record

June 9, 2016.

The stock dividend was distributed on

July 11, 2016.

The stock dividend increased the number of shares issued and outstanding by

134,177.

On

June 28, 2013,

HomeTown Bankshares Corporation completed a

$14,000,000

private placement of its convertible preferred stock. Pursuant to the terms of the Private Placement Memorandum, dated

April 17, 2013

and amended thereafter, the Company sold

14,000

shares of its

6.0%

Series C Non-Cumulative Perpetual Convertible Preferred Stock at a price of

$1,000

per share. The convertible preferred stock paid quarterly dividends equivalent to

six

percent (

6.0%

) per annum, and was convertible into shares of common stock of the Company based on a conversion price of

$6.25

per share, subject to adjustment. The Com

pany paid

$408

thousand in dividends on Series C preferred stock in

2016.

For the year

2015,

400

shares of preferred stock were converted to

64,000

shares of common stock. The remaining

13,600

shares of preferred stock were converted to

2,176,000

shares of common stock on

June 29, 2016.

The preferred shareholders were entitled to the

4%

stock dividend declared by the Board of Directors on

May 10, 2016

and received an additional

87,037

shares of common stock. 

XML

Note 21 - Reclassifications Out of Other Comprehensive Income

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Comprehensive Income (Loss) Note [Text Block]

Note

21.

 

Reclassifications Out of Other Comprehensive Income

Items

not

reclassified in their entirety to net income for t

he years ended

December 31, 2017

and

2016

are as follows:

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Years Ended December 31,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2017		2016
Available for sale securities
Realized gains on sales of securities held for sale during the period	$	69	$	257	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		24		87	Income tax expense
	$	45	$	170	Net income

XML

Note 22 - Condensed Parent Company Financial Information

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Condensed Financial Information of Parent Company Only Disclosure [Text Block]

Note

22.

Condensed Parent Company Financial Information

Financial information pertaining only to HomeTown Bankshares Corporation follows.

CONDENSED BALANCE SHEETS
Dollars In Thousands	December 31, 201 7		December 31, 201 6
Assets
Cash and due from banks	$	313	$	298
Investment in bank subsidiary		57,333		54,727
Other assets		3		—
Total assets	$	57,649	$	55,025
Liabilities and Stockholders ’ Equity
Other liabilities	$	12	$	12
Subordinated notes		7,254		7,224
Total liabilities		7,266		7,236
Stockholders ’ equity:
Total stockholders ’ equity		50,383		47,789
Total liabilities and stockholders ’ equity	$	57,649	$	55,025

CONDENSED STATEMENTS OF INCOME
Dollars In Thousands	For the year ended December 31, 201 7			For the year ended December 31, 201 6
Dividend from Bank subsidiary	$	511		$	—
Income		511			—
Interest expense		537			536
Other expenses		272			302
Expenses		809			838
Net loss before income taxes		(298	)		(838	)
Income tax benefit		275			278
Net loss before equity in undistributed net income of subsidiary		(23	)		(560	)
Undistributed net income of subsidiary		2,519			3,079
Net Income	$	2,496		$	2,519

CONDENSED STATEMENTS OF CASH FLOWS
Dollars In Thousands	For the year ended December 31, 201 7			For the year ended December 31, 201 6
Cash flows from operating activities:
Net income	$	2,496		$	2,519
Equity in undistributed net income of subsidiary bank		(2,519	)		(3,079	)
Amortization expense on subordinated notes		30			30
(Increase) decrease in other assets		(3	)		7
Decrease in interest payable		—			(18	)
Decrease in other liabilities		—			(295
Net cash flows provided by (used in) operating activities		4			(836	)
Cash flows from financing activities:
Preferred dividend payment		—			(408	)
Exercise of stock options		31			—
Net settlement of vested restricted stock		(20	)		(29	)
Cash in lieu of fractional shares		—			(5	)
Net cash flows provided by (used in) financing activities		11			(442	)
Net increase (decrease) in cash and cash equivalents		15			(1,278	)
Cash and cash equivalents, beginning		298			1,576
Cash and cash equivalents, ending	$	313		$	298
Supplemental disclosure of cash flow information:
Cash payments for interest	$	506		$	554

XML

Note 23 - Subsequent Events

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

Note

23.

Subsequent Events

On

March 19, 2018,

we received notice that a former executive of the company had passed away. We are working with insurance carriers, but as of the date of this filing, are unable to determine what net proceeds will be received from the bank owned life insurance policy. We have evaluated subsequent events after

December 31, 2017

and concluded that

no

other material transactions occurred through the date of this filing.

XML

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The consolidated financial statements include the accounts of HomeTown Bankshares Corporation and its wholly-owned subsidiary HomeTown Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated

 balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the valuation of deferred tax assets. Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate (as applicable) is susceptible to changes in local market conditions.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and amounts due from correspondent banks. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated

 balance sheet caption “cash and due from banks.”

Marketable Securities, Available-for-sale Securities, Policy [Policy Text Block]

Securities

Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management

’s intent. Currently, all of the Company’s investment securities are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than

not

that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does

not

intend to sell the security and it is

not

likely that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is

no

credit loss, there is

no

other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Company

’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Restricted Equity Securities [Policy Text Block]

Restricted Equity Securities

As members of the Federal Reserve Bank (FRB) and the Federal Ho

me Loan Bank (FHLB), the Bank is required to maintain certain minimum investments in the capital stock of the FRB and FHLB. The Company’s investment in these securities is recorded at cost, based on the redemption provisions of the FRB and FHLB.

Finance, Loan and Lease Receivables, Held-for-sale, Policy [Policy Text Block]

Loans Held for Sale

Secondary market mortgage loans are designated as held for sale at the time of their origination.

  These loans are pre-sold with servicing released and the Company does

not

retain any interest after the loans are sold.  These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government sponsored enterprises (conforming loans).  In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk.  Loans held for sale are carried at fair value.  Gains and losses on sales of loans are recognized at the loan closing date and are included in noninterest income.  

Finance, Loans and Leases Receivable, Policy [Policy Text Block]

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, allowance for loan losses and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans for all classes is discontinued when, in management

’s opinion, the borrower

may

be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past-due status of loans is determined based on contractual terms. The loan portfolio is comprised of the following classes.

● Residential real estate construction loans carry risks that the home will not be finished according to schedule, will not be finished according to the budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

● Land acquisition and development loans and commercial construction loans carry risks that the project will not be finished according to schedule, will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Land acquisition and development loans and commercial construction loans also bear the risk that the developer, in the case of land acquisition and development loans, or the general contractor, in the case of commercial construction loans, may be unable to finish the development or construction project as planned because of financial pressure unrelated to the project.

● Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

● Commercial, industrial and agricultural loans carry risks associated with the successful operation of a business. Typically repayment is dependent on the cash flow of the business, and is secured by business assets, such as accounts receivable, equipment, and inventory. There is risk associated with the value of the collateral which may depreciate over time and cannot be appraised with as much precision.

● Equity lines of credit carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

● Consumer loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are

not

classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower

’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.

TDRs (Troubled Debt Restructurings) occur when the Company agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower

’s payment history, past-due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are

no

other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and

may

be returned to accrual status based on a record of making payments as scheduled for a period of

six

consecutive months.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are charged off when they become

120

days past due. Non-consumer loans are charged off when the loan becomes

180

days past due unless the loan is well secured and in the process of collection.

Borrowers that are in bankruptcy are charged off unless the debt has been reaffirmed and is well secured and recovery is probable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current

one

is

not

on file. Appraisals are performed by independent

third

-party appraisers with relevant industry experience. Adjustments to the appraised value

may

be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as substandard or special mention that are

not

impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. The characteristics of the loan ratings are as follows:

● Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

● Special mention loans have a specific defined weakness in the borrower ’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

● Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Company ’s credit extension. The payment history for the loan may have been inconsistent, and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Company. There is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Company will be unable to collect all amounts due.

● Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification and are considered impaired.

● Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

● Loss rated loans are not considered collectible under normal circumstances, and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Loans and Leases Receivable, Origination Fees, Discounts or Premiums, and Direct Costs to Acquire Loans Policy [Policy Text Block]

Loan Fees and Costs

Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan

’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Land is carried at cost. Buildings, equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Estimated useful lives range from

ten

to

forty

years for buildings and leasehold improvements, and from

three

to

ten

years for equipment, furniture, and fixtures. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods on a straight-line basis. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized.

Finance, Loan and Lease Receivables, Held for Investments, Foreclosed Assets Policy [Policy Text Block]

Other Real Estate Owned

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance are included in the income statement in the line “Losses on sales and writedowns of other real estate owned, net.”

Bank Owned Life Insurance [Policy Text Block]

Bank Owned Life Insurance

The Company purchased

seven

life insurance policies on certain key executives. These policies are recorded at their cash surrender value. Increases in the cash surrender value of the life insurance contracts are included in noninterest income in the consolidated income statement caption “other income.”

Transfers and Servicing of Financial Assets, Policy [Policy Text Block]

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (

1

) the assets have been isolated from the Company, (

2

) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (

3

) the Company does

not

maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Advertising Costs, Policy [Policy Text Block]

Advertising Expense

The Company expenses advertising and marketing costs as they are incurred.

Income Tax, Policy [Policy Text Block]

Income Taxes

Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than

not

that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are

not

offset or aggregated with other positions. Tax positions that meet the more-likely-than-

not

recognition threshold are measured as the largest amount of tax benefit that is more than

50

percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes

 in the consolidated statement of income. There are

no

unrecognized tax benefits as of

December 31, 2017

and

2016.

Earnings Per Share, Policy [Policy Text Block]

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. Potential common shares that

may

be issued by the Company relate to the outstanding stock options. The remaining convertible preferred stock outstanding was converted to common shares on

June 29, 2016.

The preferred stock was convertible into shares of common stock of the Company based on a conversion price of

$6.25

per share, subject to adjustment for stock splits and dividends. The potential dilutive effect of the outstanding stock options is determined using the treasury stock method.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income

Comprehensive income

 reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense. These changes for the Company relate solely to unrealized gains and losses on securities available for sale.

In

February 2018,

the FASB issued ASU

2018

-

02,

“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”).” The Company early adopted this new standard in the current year. ASU

2018

-

02

requires reclassification from AOCI to retained earnings for stranded tax effects resulting from the impact of the newly enacted federal income tax rate on items included in AOCI. The amount of this reclassification in

2017

was

$24

thousand.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are

no

quoted prices for the Company

’s various financial instruments. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates

may

not

be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is,

not

a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques

may

be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation Plan

The

2005

Stock Option Plan was approved by stockholders on

April 20, 2006,

which authorized

550,000

shares of common stock to be used in the granting of incentive options to employees and directors. This

 plan expired in

2016.

Under the plan, the option price could

not

be less than the fair market value of the stock on the date granted. An option’s maximum term was

ten

years from the date of grant. Options granted under the plan were subject to a vesting schedule.

The Company accounts for the stock option plan in accordance with applicable accounting guidance. Under the fair value recognition provisions of this guidance, stock-based compensation cost was 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.

In

2009,

the Board of Directors authorized

137,280

(adjusted for

4%

stock dividend in

2016

) 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. Compensation is accounted for using the fair market value of the Company

’s common stock on the date the restricted shares are awarded.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

In

January 2016,

the FASB issued ASU

2016

-

01,

“Financial Instruments

– Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU

2016

-

01,

among other things:

1

) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

2

) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

3

) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).

4

) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after

December 15, 2017,

including interim periods within those fiscal years. The Company is currently assessing the impact that ASU

2016

-

01

will have on its consolidated financial statements.

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

“Leases (Topic

842

).” Among other things, in the amendments in ASU

2016

-

02,

lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (

1

) A lease liability, which is a lessee

‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (

2

) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. The Company does

not

expect the adoption of ASU

2016

-

02

to have a material impact on its consolidated financial statements.

In

March 2016,

the FASB issued ASU

No.

2016

-

07,

“Investments - Equity Method and Joint Ventures (Topic

323

): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor

’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting,

no

retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2016.

The amendments were required to be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of ASU

2016

-

07

did

not

have a material impact on the Company’s consolidated financial statements.

In

 

June 2016,

the FASB issued ASU

No.

2016

-

13,

“Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

For public companies that are

not

SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2020.

The Bank has formed a committee to address the compliance requirements, data gathering, archiving and analysis efforts.  The Bank plans to begin tracking data during the

2

nd

quarter of

2018

and will reassess its position during the

4

th

quarter of

2018.

  Additionally, the Bank has begun to analyze various software solutions that will assist in complying with this Standard.

In

 

August 2016,

the FASB issued ASU

No.

2016

-

15,

“Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does

not

expect the adoption of ASU

2016

-

15

to have a material impact on its consolidated financial statements.

In

 

January 2017,

the FASB issued ASU

No.

2017

-

01,

“Business Combinations (Topic

805

): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic

805,

there are

three

elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are

not

required to be present. In addition, all the inputs and processes that a seller uses in operating a set are

not

required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is

not

a business. If the screen is

not

met, the amendments (

1

) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (

2

) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after

December 15, 2017,

including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date.

No

disclosures are required at transition. The Company does

not

expect the adoption of ASU

2017

-

01

to have a material impact on its consolidated financial statements.

During

March 2017,

the FASB issued ASU

2017

‐

08,

“Receivables—Nonrefundable Fees and Other Costs (Subtopic

310‐

20

), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU

2017‐

08

will have on its consolidated financial statements.

During

May 2017,

the FASB issued ASU

2017

‐

09,

“Compensation – Stock Compensation (Topic

718

): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic

718.

  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after

December 15, 2017.

Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have

not

yet been issued. The Company is currently assessing the impact that ASU

2017‐

09

 will have on its consolidated financial statements.

During

August 2017,

the FASB issued ASU

2017

-

12,

“Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after

December 15, 2018.

Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU

2017

-

12

will have on its consolidated financial statements.

XML

Note 2 - Investment Securities (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Available-for-sale Securities Reconciliation [Table Text Block]

(Dollars In Thousands)	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	13,475	$	61	$	(101	)	$	13,435
Mortgage-backed securities and CMO ’s		24,344		12		(375	)		23,981
Corporate securities		6,991		118		(42	)		7,067
Municipal securities		10,713		213		(65	)		10,861
	$	55,523	$	404	$	(583	)	$	55,344

(Dollars In Thousands)	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	12,422	$	118	$	(96	)	$	12,444
Mortgage-backed securities and CMO ’s		19,979		54		(265	)		19,768
Corporate securities		5,000		66		-			5,066
Municipal securities		15,659		266		(228	)		15,697
	$	53,060	$	504	$	(589	)	$	52,975

Schedule of Unrealized Loss on Investments [Table Text Block]

	December 31, 2017
	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	$	6,859	$	(44	)	$	2,995	$	(57	)	$	9,854	$	(101	)
Mortgage-backed securities and CMO ’s		15,624		(192	)		7,386		(183	)		23,010		(375	)
Corporate securities		1,438		(42	)		-		-			1,438		(42	)
Municipal securities		453		(3	)		2,332		(62	)		2,785		(65	)
	$	24,374	$	(281	)	$	12,713	$	(302	)	$	37,087	$	(583	)

	December 31, 2016
	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	$	3,492	$	(32	)	$	3,491	$	(64	)	$	6,983	$	(96	)
Mortgage-backed securities and CMO ’s		14,232		(235	)		1,474		(30	)		15,706		(265	)
Corporate Securities		500		(-	)		-		(-	)		500		(-	)
Municipal securities		6,967		(223	)		262		(5	)		7,229		(228	)
	$	25,191	$	(490	)	$	5,227	$	(99	)	$	30,418	$	(589	)

Investments Classified by Contractual Maturity Date [Table Text Block]

(Dollars In Thousands)	Amortized Cost		Fair Value
Less than one year	$	245	$	245
Over one through five years		2,963		2,942
Over five through ten years		15,725		15,811
Greater than 10 years		36,590		36,346
	$	55,523	$	55,344

XML

Note 3 - Loans Receivable (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

(Dollars In Thousands)	December 31,
	2017			2016
Construction:
Residential	$	15,221		$	10,204
Land a cquisition, development & commercial		35,601			27,480
Real Estate:
Residential		121,649			111,626
Commercial		173,999			172,248
Commercial, industrial & agricultural		61,129			59,702
Equity lines		28,835			29,956
Consumer		7,693			7,668
Overdrafts		68			107
Total loans		444,195			418,991
Less allowance for loan losses		(3,758	)		(3,636	)
Loans, net	$	440,437		$	415,355

Past Due Financing Receivables [Table Text Block]

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	–	$	–	$	–	$	–	$	15,221	$	15,221	$	–
Land acquisition, development & commercial		43		–		274		317		35,284		35,601		274
Real Estate:
Residential		589		870		546		2,005		119,644		121,649		173
Commercial		278		19		209		506		173,493		173,999		209
Commercial, industrial & agricultural		130		143		392		665		60,532		61,197		403
Equity lines		544		49		–		593		28,242		28,835		49
Consumer		17		2		36		55		7,638		7,693		36
Total	$	1,601	$	1,083	$	1,457	$	4,141	$	440,054	$	444,195	$	1,144

(Dollars In Thousands)	30-59 Days Past-Due		60-89 Days Past-Due		90 Days or More Past-Due		Total Past-Due		Current		Total Loans		Nonaccrual Loans
Construction:
Residential	$	−	$	−	$	−	$	−	$	10,204	$	10,204	$	−
Land acquisition, development & commercial		−		−		−		−		27,480		27,480		−
Real Estate:
Residential		672		193		577		1,442		110,184		111,626		577
Commercial		115		−		−		115		172,133		172,248		336
Commercial, industrial & agricultural		60		33		−		93		59,716		59,809		11
Equity lines		258		−		−		258		29,698		29,956		−
Consumer		8		6		4		18		7,650		7,668		−
Total	$	1,113	$	232	$	581	$	1,926	$	417,065	$	418,991	$	924

Impaired Financing Receivables [Table Text Block]

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		181		331		–		331		10
Real Estate:
Residential		360		640		–		638		30
Commercial		4,098		4,273		–		4,166		161
Commercial, industrial & agricultural		379		379		–		379		15
Equity lines		299		299		–		300		14
Consumer		−		−		–		−		−
Total loans with no allowance	$	5,317	$	5,922	$	–	$	5,814	$	230

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		−		−		−		54		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	−	$	−	$	−	$	54	$	−

With no related allowance: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	–	$	−	$	−
Land acquisition, development & commercial		−		−		–		−		−
Real Estate:
Residential		770		770		–		629		(11	)
Commercial		6,380		6,556		–		6,521		255
Commercial, industrial & agricultural		11		11		–		11		−
Equity lines		−		−		–		−		−
Consumer		−		−		–		−		−
Total loans with no allowance	$	7,161	$	7,337	$	–	$	7,161	$	244

With an allowance recorded: (Dollars In Thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance Total Loans		Interest Income Recognized
Construction:
Residential	$	−	$	−	$	−	$	−	$	−
Land acquisition, development & commercial		−		−		−		−		−
Real Estate:
Residential		−		−		−		−		−
Commercial		115		115		17		122		−
Commercial, industrial & agricultural		−		−		−		−		−
Equity lines		−		−		−		−		−
Consumer		−		−		−		−		−
Total loans with an allowance	$	115	$	115	$	17	$	122	$	−

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Note 4 - Allowance for Loan Losses (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Allowance for Credit Losses on Financing Receivables [Table Text Block]

December 31, 2017	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	$	63	$	−		$	−	$	31		$	94	$	−	$	94	$	15,221	$	−	$	15,221
Land acquisition, development & commercial		173		(150	)		−		288			311		−		311		35,601		181		35,420
Real estate:
Residential		866		(293	)		−		382			955		−		955		121,649		360		121,289
Commercial		1,516		(454	)		43		498			1,603		−		1,603		173,999		4,098		169,901
Commercial, industrial & agricultural		461		(80	)		−		60			441		−		441		61,197		379		60,818
Equity lines		338		−			−		(101	)		237		−		237		28,835		299		28,536
Consumer		97		(101	)		15		97			108		−		108		7,693		−		7,693
Unallocated		122		−			−		(113	)		9		−		9		−		−		−
Total	$	3,636	$	(1,078	)	$	58	$	1,142		$	3,758	$	−	$	3,758	$	444,195	$	5,317	$	438,878

December 31, 2016	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	$	83	$	−		$	−	$	(20	)	$	63	$	−	$	63	$	10,204	$	−	$	10,204
Land acquisition, development & commercial		187		(2	)		−		(12	)		173		−		173		27,480		−		27,480
Real estate:
Residential		1,047		(4	)		45		(222	)		866		−		866		111,626		770		110,856
Commercial		1,001		(606	)		−		1,121			1,516		17		1,499		172,248		6,495		165,753
Commercial, industrial & agricultural		531		(34	)		−		(36	)		461		−		461		59,809		11		59,798
Equity lines		277		(99	)		10		150			338		−		338		29,956		−		29,956
Consumer		85		(103	)		49		66			97		−		97		7,668		−		7,668
Unallocated		87		−			−		35			122		−		122		−		−		−
Total	$	3,298	$	(848	)	$	104	$	1,082		$	3,636	$	17	$	3,619	$	418,991	$	7,276	$	411,715

Financing Receivable Credit Quality Indicators [Table Text Block]

(Dollars in Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Doubtful Nonaccrual		Total
Construction loans:
Residential	$	15,221	$	−	$	−	$	−	$	−	$	15,221
Land acquisition, development & commercial		31,433		3,987		−		181		−		35,601
Real estate loans:
Residential		120,575		342		559		−		173		121,649
Commercial		165,760		7,386		644		209		−		173,999
Commercial, industrial, agricultural		59,042		1,249		503		379		24		61,197
Equity lines		28,536		−		299		−		−		28,835
Consumer		7,658		−		−		35		−		7,693
Total Loans	$	428,225	$	12,964	$	2,005	$	804	$	197	$	444,195

(Dollars In Thousands)	Pass		Special Mention		Substandard Accruing		Substandard Nonaccrual		Total
Construction loans:
Residential	$	10,204	$	−	$	−	$	−	$	10,204
Land acquisition, development & commercial		27,480		−		−		−		27,480
Real estate loans:
Residential		110,856		−		193		577		111,626
Commercial		171,369		−		543		336		172,248
Commercial, industrial, agricultural		59,120		78		600		11		59,809
Equity lines		29,956		−		−		−		29,956
Consumer		7,668		−		−		−		7,668
Total Loans	$	416,653	$	78	$	1,336	$	924	$	418,991

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Note 5 - Other Real Estate Owned (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Forclosed Properties [Table Text Block]

(Dollars i n Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	4,619		$	(825	)	$	3,794
Additions		1,024			—			1,024
Writedowns		—			(588	)		(588	)
Sales		(1,597	)		616			(981	)
Balance at the end of the year	$	4,046		$	(797	)	$	3,249

(Dollars i n Thousands)	Other Real Estate Owned			Valuation Allowance			Net
Balance at the beginning of the year	$	5,657		$	(420	)	$	5,237
Additions		481			—			481
Writedowns		—			(405	)		(405	)
Sales		(1,519	)		—			(1,519	)
Balance at the end of the year	$	4,619		$	(825	)	$	3,794

Schedule of Real Estate Properties [Table Text Block]

(Dollars i n Thousands)	2017		2016
Residential lots	$	1,745	$	2,234
Residential development		-		423
Residential real estate		1,024		-
Commercial lots		90		90
Commercial buildings		390		1,047
Total Other Real Estate Owned	$	3,249	$	3,794

(Dollars i n Thousands)	2017			2016
Net (gain)/loss on sales	$	(7	)	$	90
Provision for unrealized losses		588			405
Operating expenses		106			97
Total Other Real Estate Owned	$	687		$	592

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Note 6 - Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Property, Plant and Equipment [Table Text Block]

(Dollars i n Thousands)	2017		2016
Land	$	4,309	$	4,309
Buildings and improvements		8,617		8,617
Leasehold improvements		2,154		2,156
Furniture and equipment		2,314		3,214
Software		296		556
Construction in process		4		10
Property and equipment, total		17,694		18,862
Less accumulated depreciation and amortization		4,757		5,491
Property and equipment, net	$	12,937	$	13,371

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

(Dollars In Thousands)	2017
2018	$	288
2019		274
2020		274
2021		268
2022		270
Thereafter		875
Total	$	2,249

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Note 7 - Deposits (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Time Deposit Maturities [Table Text Block]

(Dollars In Thousands)	2017
2018	$	76,524
2019		27,215
2020		14,492
2021		6,355
2022 and thereafter		6,878
Total	$	131,464

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Note 8 - Federal Home Loan Bank Borrowings (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Federal Home Loan Bank, Advances, by Branch of FHLB Bank [Table Text Block]

(Dollars In Thousands)
Advance Date	Maturity Date	Conversion Date	Current Rate	2017		2016
January 14, 2015	January 16, 2018	Quarterly	1.090%	$	4,000	$	4,000
August 19, 2016	August 20, 2018	Quarterly	2.535%		4,000		4,000
January 3, 2017	January 3, 2020	N/A	1.500%		695		-
February 3, 2017	February 3, 2020	N/A	1.490%		722		-
May 3, 2017	May 4, 2010	N/A	1.580%		1,611		-
				$	11,028	$	8,000

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Note 9 - Subordinated Notes (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Subordinated Borrowing [Table Text Block]

(Dollars in Thousands)
As of December 31, 201 7	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	246	$	7,254

(Dollars in Thousands)
As of December 31, 2016	Principal		Unamortized Debt Issuance Costs		Net
Subordinated notes	$	7,500	$	276	$	7,224

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Note 10 - Other Borrowings (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Short-term Debt [Table Text Block]

(Dollars In Thousands)	2017			2016
Securities sold under agreements to repurchase	$	-		$	452
Warehouse line of credit		1,558			665
	$	1,558		$	1,117
Weighted average interest rate at December 31		4.11	%		2.07	%

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Note 11 - Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

(Dollars in Thousands)			Car rying value at December 31, 2017
Description	Balance as of December 31, 2017		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	$	13,435	$	–	$	13,435	$	–
Mortgage-backed securities and CMO ’s		23,981		–		23,981		–
Corporate securities		7,067		–		7,067		–
Municipal securities		10,861		–		10,861		–

(Dollars in Thousands)			Car rying value at December 31, 2016
Description	Balance as of December 31, 2016		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	$	12,444	$	–	$	12,444	$	–
Mortgage-backed securities and CMO ’s		19,768		–		19,768		–
Corporate securities		5,066		–		5,066		–
Municipal securities		15,697		–		15,697		–

Fair Value Measurements, Nonrecurring [Table Text Block]

(Dollars i n Thousands)			Car rying value at December 31, 2017
Description	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale	$	1,587	$	–	$	1,587	$	–
Other real estate owned		3,249		–		–		3,249

(Dollars i n Thousands)			Carrying value at Decem ber 31, 2016
Description	Balance as of December 31, 2016		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	$	98	$	–	$	–	$	98
Loans held for sale		678		–		678		–
Other real estate owned		3,794		–		–		3,794

Fair Value Inputs, Assets, Quantitative Information [Table Text Block]

(Dollars i n Thousands)	Quantitative information about Level 3 Fair Value Me asurements for December 31, 2017
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Other real estate owned	$	2,254	Discounted appraised value	Selling cost	6	%	-	10	%	(8%	)
				Discount for lack of marketability and age of appraisal	0	%	-	43	%	(7%	)
	$	995	Internal evaluations	Internal evaluations	19	%	-	19	%	(19%	)

(Dollars i n Thousands)	Quantitative information about Level 3 Fair Value Me asurements for December 31, 2016
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	98	Discounted appraised value	Residual cash flows discount rate	6	%	-	6	%	(6%	)
Other real estate owned	$	1,560	Discounted appraised value	Selling cost	6	%	-	6	%	(6%	)
				Discount for lack of marketability and age of appraisal	4	%	-	12	%	(10%	)
	$	2,234	Internal evaluations	Internal evaluations	4	%	-	54	%	(24%	)

Fair Value, by Balance Sheet Grouping [Table Text Block]

(Dollars i n Thousands)			Fair value at December 31, 2017
Description	Carrying value as of December 31, 2017		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	$	21,714	$	21,714	$	–	$	–	$	21,714
Federal funds sold		180		180		–		–		180
Securities available for sale		55,344		–		55,344		–		55,344
Restricted equity securities		2,371		–		2,371		–		2,371
Loans held for sale		1,587		–		1,587		–		1,587
Loans, net		440,437		–		–		438,449		438,449
Bank owned life insurance		8,669		–		8,669		–		8,669
Accrued income		2,681		–		2,681		–		2,681
Financial liabilities
Total deposits		477,320		–		477,599		–		477,599
FHLB borrowings		11,028		–		11,150		–		11,150
Subordinated notes		7,254		–		7,890		–		7,890
Other borrowings		1,558		–		1,558		–		1,558
Accrued interest payable		368		–		368		–		368

(Dollars In Thousands)			Fair value at December 31, 2016
Description	Carrying value as of December 31, 2016		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	$	18,229	$	17,479	$	760	$	–	$	18,239
Federal funds sold		42		42		–		–		42
Securities available for sale		52,975		–		52,975		–		52,975
Restricted equity securities		2,213		–		2,213		–		2,213
Loans held for sale		678		–		678		–		678
Loans, net		415,355		–		–		415,039		415,039
Bank owned life insurance		7,469		–		7,469		–		7,469
Accrued income		2,289		–		2,289		–		2,289
Financial liabilities
Total deposits		450,848		–		451,385		–		451,385
FHLB borrowings		8,000		–		8,031		–		8,031
Subordinated notes		7,224		–		8,012		–		8,012
Other borrowings		1,117		–		1,117		–		1,117
Accrued interest payable		386		–		386		–		386

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Note 12 - Earnings Per Common Share (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	For the Years Ended December 31,
	2017						2016
Dollars in Thousands, except share and per share data	Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount		Weighted Average Common Shares Outstanding		Net Income Available to Common Shareholders		Per Share Amount
Earnings per common share, basic		5,769,752	$	2,496	$	0.43		4,652,853	$	2,111	$	0.45
Effect of dilutive securities:
Convertible preferred stock		−		−		−		1,112,970		−		(0.08	)
Dilutive stock options		34,630		−		−		10,469		−		−
Earnings per common share, diluted		5,804,382	$	2,496	$	0.43		5,776,292	$	2,111	$	0.37

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Note 13 - Stock Based Compensation (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value(1)		Weighted Average Contractual Term (years)
Balance at December 31, 2016		201,000		$	7.80
Granted		–			–
Exercised		(4,500	)		6.90
Expired		(9,500	)		8.69
Forfeited		–			–
Balance at December 31, 2017		187,000		$	7.78	$	641,131		5.62
Exercisable at December 31, 2017		125,800		$	8.21	$	379,568		4.96

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

	2017					2016
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		31,546		$	7.03		39,352	*	$	6.00	*
Granted		13,258			10.24		11,149	*		9.09	*
Vested		(11,920	)		6.18		(12,167	) *		5.63	*
Forfeited		(797	)		8.37		(6,788	) *		6.99	*
Nonvested at the end of the period		32,087		$	8.63		31,546	*	$	7.03	*

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Note 16 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

(Dollars In Thousands)	201 7			201 6
Current	$	1,351		$	1,496
Deferred		(123	)		(56	)
Income tax expense	$	1,228		$	1,440

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

(Dollars In Thousands)	2017			2016
Tax at statutory federal rate	$	1,291		$	1,367
Tax-exempt interest income		(116	)		(201	)
Cash surrender value of life insurance		(68	)		(63	)
Incentive stock options		24			261
Tax impact from enacted change in tax rate		100			–
Other		(3	)		76
Income tax expense	$	1,228		$	1,440

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

(Dollars In Thousands)	201 7		201 6
Deferred tax assets
Pre-opening expenses	$	28	$	62
Allowance for loan losses		528		693
Deferred compensation		215		226
Other real estate expenses		187		280
Unrealized loss on securities available for sale		38		29
Nonaccrual loan interest		9		17
Other		17		21
Deferred tax asset		1,022		1,328
Deferred tax liabilities
Property and equipment		230		305
Deferred loan fees		613		980
Other		17		13
Deferred tax liability		860		1,298
Net deferred tax asset	$	162	$	30

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Note 17 - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Fair Value, Off-balance Sheet Risks [Table Text Block]

(Dollars In Thousands)	201 7		201 6
Commitments to extend credit	$	109,285	$	102,277
Standby letters of credit		6,711		4,255

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Note 18 - Regulatory Restrictions (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations [Table Text Block]

HomeTown Bank December 31, 2017	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)	$	61,257		12.48	%	$	45,403		9.25	%	$	49,084		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		57,474		11.71	%		28,222		5.75	%		31,903		6.50	%
Tier I Capital (to Risk-Weighted Assets)		57,499		11.72	%		35,569		7.25	%		39,248		8.00	%
Tier I Capital (to Average Assets)		57,499		10.39	%		22,136		4.00	%		27,670		5.00	%

HomeTown Bank December 31, 2016	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) %	$	58,436		12.59	%	$	40,045		8.625	%	$	46,429		10.00	%
Tier I Common Equity (to Risk-Weighted Assets)		54,783		11.80	%		23,795		5.125	%		30,179		6.50	%
Tier I Capital (to Risk-Weighted Assets)		54,800		11.80	%		30,759		6.625	%		37,143		8.00	%
Tier I Capital (to Average Assets)		54,800		10.67	%		20,537		4.00	%		25,671		5.00	%

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Note 19 - Transactions With Related Parties (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Related Party Transactions [Table Text Block]

(Dollars In Thousands)	2017			2016
Balance, beginning	$	8,194		$	7,124
New loans		392			5,261
Repayments		(4,637	)		(4,191	)
Balance, ending	$	3,949		$	8,194

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Note 21 - Reclassifications Out of Other Comprehensive Income (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Reclassification out of Accumulated Other Comprehensive Income [Table Text Block]

Details about Other Comprehensive Components	Amounts Reclassified from Other Comprehensive Income for the Years Ended December 31,				Affected Line Item in the Statement Where Net Income is Presented
(Dollars In Thousands)	2017		2016
Available for sale securities
Realized gains on sales of securities held for sale during the period	$	69	$	257	Gains on sales of investment securities
Tax expense related to realized gains on securities sold		24		87	Income tax expense
	$	45	$	170	Net income

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Note 22 - Condensed Parent Company Financial Information (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Condensed Balance Sheet [Table Text Block]

CONDENSED BALANCE SHEETS
Dollars In Thousands	December 31, 201 7		December 31, 201 6
Assets
Cash and due from banks	$	313	$	298
Investment in bank subsidiary		57,333		54,727
Other assets		3		—
Total assets	$	57,649	$	55,025
Liabilities and Stockholders ’ Equity
Other liabilities	$	12	$	12
Subordinated notes		7,254		7,224
Total liabilities		7,266		7,236
Stockholders ’ equity:
Total stockholders ’ equity		50,383		47,789
Total liabilities and stockholders ’ equity	$	57,649	$	55,025

Condensed Income Statement [Table Text Block]

CONDENSED STATEMENTS OF INCOME
Dollars In Thousands	For the year ended December 31, 201 7			For the year ended December 31, 201 6
Dividend from Bank subsidiary	$	511		$	—
Income		511			—
Interest expense		537			536
Other expenses		272			302
Expenses		809			838
Net loss before income taxes		(298	)		(838	)
Income tax benefit		275			278
Net loss before equity in undistributed net income of subsidiary		(23	)		(560	)
Undistributed net income of subsidiary		2,519			3,079
Net Income	$	2,496		$	2,519

Condensed Cash Flow Statement [Table Text Block]

CONDENSED STATEMENTS OF CASH FLOWS
Dollars In Thousands	For the year ended December 31, 201 7			For the year ended December 31, 201 6
Cash flows from operating activities:
Net income	$	2,496		$	2,519
Equity in undistributed net income of subsidiary bank		(2,519	)		(3,079	)
Amortization expense on subordinated notes		30			30
(Increase) decrease in other assets		(3	)		7
Decrease in interest payable		—			(18	)
Decrease in other liabilities		—			(295
Net cash flows provided by (used in) operating activities		4			(836	)
Cash flows from financing activities:
Preferred dividend payment		—			(408	)
Exercise of stock options		31			—
Net settlement of vested restricted stock		(20	)		(29	)
Cash in lieu of fractional shares		—			(5	)
Net cash flows provided by (used in) financing activities		11			(442	)
Net increase (decrease) in cash and cash equivalents		15			(1,278	)
Cash and cash equivalents, beginning		298			1,576
Cash and cash equivalents, ending	$	313		$	298
Supplemental disclosure of cash flow information:
Cash payments for interest	$	506		$	554

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Note 1 - Organization and Summary of Significant Accounting Policies (Details Textual) $ / shares in Units, $ in Thousands		12 Months Ended
	Jul. 11, 2016	Dec. 31, 2017 USD ($) shares	Dec. 31, 2016 USD ($)	Dec. 31, 2013	Jun. 29, 2016 $ / shares	Apr. 20, 2006 shares
Financing Receivable, Modifications, Return to Accrual Status Term		180 days
Bank Owned Life Insurance, Number of Policies		7
Unrecognized Tax Benefits		$ 0	$ 0
Preferred Stock Convertible Conversion Price | $ / shares					$ 6.25
Reclassification of Stranded Tax Effects from Change in Tax Rate
Dividends, Common Stock, Stock, Percentge	4.00%
2005 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized | shares						550,000
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
Restricted Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized | shares		137,280
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		5 years
Retained Earnings [Member]
Reclassification of Stranded Tax Effects from Change in Tax Rate		$ 24
AOCI Attributable to Parent [Member]
Reclassification of Stranded Tax Effects from Change in Tax Rate		$ (24)
Building [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life		10 years
Building [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life		40 years
Equipment [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life		3 years
Equipment [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life		10 years
Consumer Portfolio Segment [Member]
Threshold Period Past Due for Write-off of Financing Receivable		120 days
Non-consumer Portfolio Segment [Member]
Threshold Period Past Due for Write-off of Financing Receivable		180 days
Corporate Joint Venture [Member] | Home Town Residential Mortgage LLC [Member]
Subsidiary or Equity Method Investee, Cumulative Percentage Ownership after All Transactions				49.00%

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Note 2 - Investment Securities (Details Textual) $ in Thousands	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Proceeds from Maturities, Prepayments and Calls of Available-for-sale Securities	$ 20,544	$ 14,379
Available-for-sale Securities, Gross Realized Gain (Loss)	$ 69	$ 257
Available-for-sale Securities, Number Sold	45	14
Available-for-sale Securities, Gross Realized Gains	$ 170	$ 262
Available-for-sale Securities, Gross Realized Losses	101	5
Available-for-sale Securities Pledged as Collateral	4,000	$ 6,200
Public Deposits [Member]
Available-for-sale Securities Pledged as Collateral	2,300
Federal Home Loan Bank Borrowing [Member]
Available-for-sale Securities Pledged as Collateral	112
Other Purposes [Member]
Available-for-sale Securities Pledged as Collateral	$ 1,600
US Government Agencies Debt Securities [Member]
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions	24
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities	$ 0
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions	35
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities	$ 0
Corporate Debt Securities [Member]
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions	2
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities	$ 0
US States and Political Subdivisions Debt Securities [Member]
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions	6
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities	$ 0

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Note 2 - Investment Securities - Available-for-sale Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Securities available-for-sale, amortized cost	$ 55,523	$ 53,060
Securities available-for-sale, gross unrealized gains	404	504
Securities available-for-sale, gross unrealized losses	(583)	(589)
Securities available for sale, at fair value	55,344	52,975
US Government Agencies Debt Securities [Member]
Securities available-for-sale, amortized cost	13,475	12,422
Securities available-for-sale, gross unrealized gains	61	118
Securities available-for-sale, gross unrealized losses	(101)	(96)
Securities available for sale, at fair value	13,435	12,444
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale, amortized cost	24,344	19,979
Securities available-for-sale, gross unrealized gains	12	54
Securities available-for-sale, gross unrealized losses	(375)	(265)
Securities available for sale, at fair value	23,981	19,768
Corporate Debt Securities [Member]
Securities available-for-sale, amortized cost	6,991	5,000
Securities available-for-sale, gross unrealized gains	118	66
Securities available-for-sale, gross unrealized losses	(42)
Securities available for sale, at fair value	7,067	5,066
US States and Political Subdivisions Debt Securities [Member]
Securities available-for-sale, amortized cost	10,713	15,659
Securities available-for-sale, gross unrealized gains	213	266
Securities available-for-sale, gross unrealized losses	(65)	(228)
Securities available for sale, at fair value	$ 10,861	$ 15,697

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Note 2 - Investment Securities - Unrealized Loss Positions of Available-for-sale Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Securities available-for-sale in a continuous unrealized loss position, less than 12 months fair value	$ 24,374	$ 25,191
Securities available-for-sale in a continuous unrealized loss position, less than 12 months unrealized loss	(281)	(490)
Securities available-for-sale in a continuous unrealized loss position, 12 months or more fair value	12,713	5,227
Securities available-for-sale in a continuous unrealized loss position, 12 months or more unrealized loss	(302)	(99)
Securities available-for-sale in a continuous unrealized loss position, total fair value	37,087	30,418
Securities available-for-sale in a continuous unrealized loss position, total unrealized loss	(583)	(589)
US Government Agencies Debt Securities [Member]
Securities available-for-sale in a continuous unrealized loss position, less than 12 months fair value	6,859	3,492
Securities available-for-sale in a continuous unrealized loss position, less than 12 months unrealized loss	(44)	(32)
Securities available-for-sale in a continuous unrealized loss position, 12 months or more fair value	2,995	3,491
Securities available-for-sale in a continuous unrealized loss position, 12 months or more unrealized loss	(57)	(64)
Securities available-for-sale in a continuous unrealized loss position, total fair value	9,854	6,983
Securities available-for-sale in a continuous unrealized loss position, total unrealized loss	(101)	(96)
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale in a continuous unrealized loss position, less than 12 months fair value	15,624	14,232
Securities available-for-sale in a continuous unrealized loss position, less than 12 months unrealized loss	(192)	(235)
Securities available-for-sale in a continuous unrealized loss position, 12 months or more fair value	7,386	1,474
Securities available-for-sale in a continuous unrealized loss position, 12 months or more unrealized loss	(183)	(30)
Securities available-for-sale in a continuous unrealized loss position, total fair value	23,010	15,706
Securities available-for-sale in a continuous unrealized loss position, total unrealized loss	(375)	(265)
Corporate Debt Securities [Member]
Securities available-for-sale in a continuous unrealized loss position, less than 12 months fair value	1,438	500
Securities available-for-sale in a continuous unrealized loss position, less than 12 months unrealized loss	(42)
Securities available-for-sale in a continuous unrealized loss position, 12 months or more fair value
Securities available-for-sale in a continuous unrealized loss position, 12 months or more unrealized loss
Securities available-for-sale in a continuous unrealized loss position, total fair value	1,438	500
Securities available-for-sale in a continuous unrealized loss position, total unrealized loss	(42)
US States and Political Subdivisions Debt Securities [Member]
Securities available-for-sale in a continuous unrealized loss position, less than 12 months fair value	453	6,967
Securities available-for-sale in a continuous unrealized loss position, less than 12 months unrealized loss	(3)	(223)
Securities available-for-sale in a continuous unrealized loss position, 12 months or more fair value	2,332	262
Securities available-for-sale in a continuous unrealized loss position, 12 months or more unrealized loss	(62)	(5)
Securities available-for-sale in a continuous unrealized loss position, total fair value	2,785	7,229
Securities available-for-sale in a continuous unrealized loss position, total unrealized loss	$ (65)	$ (228)

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Note 2 - Investment Securities - Available-for-sale Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Less than one year, available-for-sale securities, amortized cost	$ 245
Over one through five years, available-for-sale securities, amortized cost	2,963
Over five through ten years, available-for-sale securities, amortized cost	15,725
Greater than 10 years, available-for-sale securities, amortized cost	36,590
Available-for-sale securities, amortized cost	55,523	$ 53,060
Less than one year, available-for-sale securities, fair value	245
Over one through five years, available-for-sale securities, fair value	2,942
Over five through ten years, available-for-sale securities, fair value	15,811
Greater than 10 years, available-for-sale securities, fair value	36,346
Available-for-sale securities, fair value	$ 55,344	$ 52,975

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Note 3 - Loans Receivable (Details Textual)	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Financing Receivable, 90 Days Past Due and Still Accruing, Number of Loans	1	2
Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing	$ 373,000	$ 4,000
Financing Receivable, Modifications, Recorded Investment	$ 4,100,000	$ 6,400,000
Financing Receivable, Troubled Debt Restructuring, Number of Contracts	4	5
Allowance for Credit Losses, Change in Method of Calculating Impairment	$ 0	$ 0
Financing Receivable, Modifications, Number of Contracts	0	0
Performing Financial Instruments [Member]
Financing Receivable, Modifications, Recorded Investment	$ 3,900,000	$ 6,200,000
Financing Receivable, Troubled Debt Restructuring, Number of Contracts	2	3
Nonperforming Financial Instruments [Member]
Financing Receivable, Modifications, Recorded Investment	$ 219,000	$ 231,000
Financing Receivable, Troubled Debt Restructuring, Number of Contracts	2	2

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Note 3 - Loans Receivable - Classifications of Loans Receivable (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Loans	$ 444,195	$ 418,991
Less allowance for loan losses	(3,758)	(3,636)	$ (3,298)
Loans, net	440,437	415,355
Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans	15,221	10,204
Less allowance for loan losses	(94)	(63)	(83)
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans	35,601	27,480
Less allowance for loan losses	(311)	(173)	(187)
Real Estate Portfolio Segment [Member] | Residential [Member]
Loans	121,649	111,626
Less allowance for loan losses	(955)	(866)	(1,047)
Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans	173,999	172,248
Less allowance for loan losses	(1,603)	(1,516)	(1,001)
Commercial Industrial And Agricultural Portfolio Segment Excluding Overdrafts [Member]
Loans	61,129	59,702
Equity Lines Portfolio Segment [Member]
Loans	28,835	29,956
Less allowance for loan losses	(237)	(338)	(277)
Consumer Portfolio Segment [Member]
Loans	7,693	7,668
Less allowance for loan losses	(108)	(97)	$ (85)
Overdrafts Portfolio Segment [Member]
Loans	$ 68	$ 107

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Note 3 - Loans Receivable - Past Due and Non-accrual Status of Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Loans, past due	$ 4,141	$ 1,926
Loans, current	440,054	417,065
Loans	444,195	418,991
Loans, nonaccrual loans	1,144	924
Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans, past due
Loans, current	15,221	10,204
Loans	15,221	10,204
Loans, nonaccrual loans
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans, past due	317
Loans, current	35,284	27,480
Loans	35,601	27,480
Loans, nonaccrual loans	274
Real Estate Portfolio Segment [Member] | Residential [Member]
Loans, past due	2,005	1,442
Loans, current	119,644	110,184
Loans	121,649	111,626
Loans, nonaccrual loans	173	577
Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans, past due	506	115
Loans, current	173,493	172,133
Loans	173,999	172,248
Loans, nonaccrual loans	209	336
Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans, past due	665	93
Loans, current	60,532	59,716
Loans	61,197	59,809
Loans, nonaccrual loans	403	11
Equity Lines Portfolio Segment [Member]
Loans, past due	593	258
Loans, current	28,242	29,698
Loans	28,835	29,956
Loans, nonaccrual loans	49
Consumer Portfolio Segment [Member]
Loans, past due	55	18
Loans, current	7,638	7,650
Loans	7,693	7,668
Loans, nonaccrual loans	36
Financing Receivables, 30 to 59 Days Past Due [Member]
Loans, past due	1,601	1,113
Financing Receivables, 30 to 59 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans, past due
Financing Receivables, 30 to 59 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans, past due	43
Financing Receivables, 30 to 59 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Residential [Member]
Loans, past due	589	672
Financing Receivables, 30 to 59 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans, past due	278	115
Financing Receivables, 30 to 59 Days Past Due [Member] | Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans, past due	130	60
Financing Receivables, 30 to 59 Days Past Due [Member] | Equity Lines Portfolio Segment [Member]
Loans, past due	544	258
Financing Receivables, 30 to 59 Days Past Due [Member] | Consumer Portfolio Segment [Member]
Loans, past due	17	8
Financing Receivables, 60 to 89 Days Past Due [Member]
Loans, past due	1,083	232
Financing Receivables, 60 to 89 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans, past due
Financing Receivables, 60 to 89 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans, past due
Financing Receivables, 60 to 89 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Residential [Member]
Loans, past due	870	193
Financing Receivables, 60 to 89 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans, past due	19
Financing Receivables, 60 to 89 Days Past Due [Member] | Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans, past due	143	33
Financing Receivables, 60 to 89 Days Past Due [Member] | Equity Lines Portfolio Segment [Member]
Loans, past due	49
Financing Receivables, 60 to 89 Days Past Due [Member] | Consumer Portfolio Segment [Member]
Loans, past due	2	6
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Loans, past due	1,457	581
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans, past due
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans, past due	274
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Residential [Member]
Loans, past due	546	577
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans, past due	209
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans, past due	392
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Equity Lines Portfolio Segment [Member]
Loans, past due
Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Consumer Portfolio Segment [Member]
Loans, past due	$ 36	$ 4

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Note 3 - Loans Receivable - Impaired Loans (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Loans with no related allowance, recorded investment in loans	$ 5,317	$ 7,161
Loans with no related allowance, unpaid principal balance	5,922	7,337
Loans with no related allowance, average balance total loans	5,814	7,161
Loans with no related allowance, interest income recognized	230	244
Loans with a related allowance, recorded investment in loans		115
Loans with a related allowance, unpaid principal balance		115
Related allowance		17
Loans with a related allowance, average balance total loans	54	122
Loans with a related allowance, interest income recognized
Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans with no related allowance, recorded investment in loans
Loans with no related allowance, unpaid principal balance
Loans with no related allowance, average balance total loans
Loans with no related allowance, interest income recognized
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans with no related allowance, recorded investment in loans	181
Loans with no related allowance, unpaid principal balance	331
Loans with no related allowance, average balance total loans	331
Loans with no related allowance, interest income recognized	10
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized
Real Estate Portfolio Segment [Member] | Residential [Member]
Loans with no related allowance, recorded investment in loans	360	770
Loans with no related allowance, unpaid principal balance	640	770
Loans with no related allowance, average balance total loans	638	629
Loans with no related allowance, interest income recognized	30	(11)
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized
Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans with no related allowance, recorded investment in loans	4,098	6,380
Loans with no related allowance, unpaid principal balance	4,273	6,556
Loans with no related allowance, average balance total loans	4,166	6,521
Loans with no related allowance, interest income recognized	161	255
Loans with a related allowance, recorded investment in loans		115
Loans with a related allowance, unpaid principal balance		115
Related allowance		17
Loans with a related allowance, average balance total loans	54	122
Loans with a related allowance, interest income recognized
Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans with no related allowance, recorded investment in loans	379	11
Loans with no related allowance, unpaid principal balance	379	11
Loans with no related allowance, average balance total loans	379	11
Loans with no related allowance, interest income recognized	15
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized
Equity Lines Portfolio Segment [Member]
Loans with no related allowance, recorded investment in loans	299
Loans with no related allowance, unpaid principal balance	299
Loans with no related allowance, average balance total loans	300
Loans with no related allowance, interest income recognized	14
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized
Consumer Portfolio Segment [Member]
Loans with no related allowance, recorded investment in loans
Loans with no related allowance, unpaid principal balance
Loans with no related allowance, average balance total loans
Loans with no related allowance, interest income recognized
Loans with a related allowance, recorded investment in loans
Loans with a related allowance, unpaid principal balance
Related allowance
Loans with a related allowance, average balance total loans
Loans with a related allowance, interest income recognized

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Note 4 - Allowance for Loan Losses (Details Textual) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Loans and Leases Receivable, Gross	$ 444,195	$ 418,991
Unlikely to be Collected Financing Receivable [Member]
Loans and Leases Receivable, Gross	0	0
Doubtful [Member]
Loans and Leases Receivable, Gross	$ 197	$ 0

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Note 4 - Allowance for Loan Losses - Allowance for Loan Losses (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Allowance for loan losses, beginning balance	$ 3,636	$ 3,298
Allowance for loan losses, charge- offs	(1,078)	(848)
Allowance for loan losses, recoveries	58	104
Allowance for loan losses, provisions	1,142	1,082
Allowance for loan losses, ending balance	3,758	3,636
Allowance for loan losses: individually evaluated for impairment		17
Allowance for loan losses: collectively evaluated for impairment	3,758	3,619
Loans	444,195	418,991
Loans: individually evaluated for impairment	5,317	7,276
Loans: collectively evaluated for impairment	438,878	411,715
Construction Loan Portfolio Segment [Member] | Residential [Member]
Allowance for loan losses, beginning balance	63	83
Allowance for loan losses, charge- offs
Allowance for loan losses, recoveries
Allowance for loan losses, provisions	31	(20)
Allowance for loan losses, ending balance	94	63
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	94	63
Loans	15,221	10,204
Loans: individually evaluated for impairment
Loans: collectively evaluated for impairment	15,221	10,204
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Allowance for loan losses, beginning balance	173	187
Allowance for loan losses, charge- offs	(150)	(2)
Allowance for loan losses, recoveries
Allowance for loan losses, provisions	288	(12)
Allowance for loan losses, ending balance	311	173
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	311	173
Loans	35,601	27,480
Loans: individually evaluated for impairment	181
Loans: collectively evaluated for impairment	35,420	27,480
Real Estate Portfolio Segment [Member] | Residential [Member]
Allowance for loan losses, beginning balance	866	1,047
Allowance for loan losses, charge- offs	(293)	(4)
Allowance for loan losses, recoveries		45
Allowance for loan losses, provisions	382	(222)
Allowance for loan losses, ending balance	955	866
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	955	866
Loans	121,649	111,626
Loans: individually evaluated for impairment	360	770
Loans: collectively evaluated for impairment	121,289	110,856
Real Estate Portfolio Segment [Member] | Commercial [Member]
Allowance for loan losses, beginning balance	1,516	1,001
Allowance for loan losses, charge- offs	(454)	(606)
Allowance for loan losses, recoveries	43
Allowance for loan losses, provisions	498	1,121
Allowance for loan losses, ending balance	1,603	1,516
Allowance for loan losses: individually evaluated for impairment		17
Allowance for loan losses: collectively evaluated for impairment	1,603	1,499
Loans	173,999	172,248
Loans: individually evaluated for impairment	4,098	6,495
Loans: collectively evaluated for impairment	169,901	165,753
Commercial Industrial and Agricultural Portfolio Segment [Member]
Allowance for loan losses, beginning balance	461	531
Allowance for loan losses, charge- offs	(80)	(34)
Allowance for loan losses, recoveries
Allowance for loan losses, provisions	60	(36)
Allowance for loan losses, ending balance	441	461
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	441	461
Loans	61,197	59,809
Loans: individually evaluated for impairment	379	11
Loans: collectively evaluated for impairment	60,818	59,798
Equity Lines Portfolio Segment [Member]
Allowance for loan losses, beginning balance	338	277
Allowance for loan losses, charge- offs		(99)
Allowance for loan losses, recoveries		10
Allowance for loan losses, provisions	(101)	150
Allowance for loan losses, ending balance	237	338
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	237	338
Loans	28,835	29,956
Loans: individually evaluated for impairment	299
Loans: collectively evaluated for impairment	28,536	29,956
Consumer Portfolio Segment [Member]
Allowance for loan losses, beginning balance	97	85
Allowance for loan losses, charge- offs	(101)	(103)
Allowance for loan losses, recoveries	15	49
Allowance for loan losses, provisions	97	66
Allowance for loan losses, ending balance	108	97
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	108	97
Loans	7,693	7,668
Loans: individually evaluated for impairment
Loans: collectively evaluated for impairment	7,693	7,668
Unallocated Financing Receivables [Member]
Allowance for loan losses, beginning balance	122	87
Allowance for loan losses, charge- offs
Allowance for loan losses, recoveries
Allowance for loan losses, provisions	(113)	35
Allowance for loan losses, ending balance	9	122
Allowance for loan losses: individually evaluated for impairment
Allowance for loan losses: collectively evaluated for impairment	9	122
Loans
Loans: individually evaluated for impairment
Loans: collectively evaluated for impairment

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Note 4 - Allowance for Loan Losses - Loans by Credit Quality Indicators (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Loans	$ 444,195	$ 418,991
Pass [Member]
Loans	428,225	416,653
Special Mention [Member]
Loans	12,964	78
Substandard [Member]
Loans	2,005	1,336
Substandard Nonaccrual [Member]
Loans	804	924
Doubtful [Member]
Loans	197	0
Construction Loan Portfolio Segment [Member] | Residential [Member]
Loans	15,221	10,204
Construction Loan Portfolio Segment [Member] | Residential [Member] | Pass [Member]
Loans	15,221	10,204
Construction Loan Portfolio Segment [Member] | Residential [Member] | Special Mention [Member]
Loans
Construction Loan Portfolio Segment [Member] | Residential [Member] | Substandard [Member]
Loans
Construction Loan Portfolio Segment [Member] | Residential [Member] | Substandard Nonaccrual [Member]
Loans
Construction Loan Portfolio Segment [Member] | Residential [Member] | Doubtful [Member]
Loans
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member]
Loans	35,601	27,480
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member] | Pass [Member]
Loans	31,433	27,480
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member] | Special Mention [Member]
Loans	3,987
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member] | Substandard [Member]
Loans
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member] | Substandard Nonaccrual [Member]
Loans	181
Construction Loan Portfolio Segment [Member] | Land Acquisition Development And Commercial [Member] | Doubtful [Member]
Loans
Real Estate Portfolio Segment [Member] | Residential [Member]
Loans	121,649	111,626
Real Estate Portfolio Segment [Member] | Residential [Member] | Pass [Member]
Loans	120,575	110,856
Real Estate Portfolio Segment [Member] | Residential [Member] | Special Mention [Member]
Loans	342
Real Estate Portfolio Segment [Member] | Residential [Member] | Substandard [Member]
Loans	559	193
Real Estate Portfolio Segment [Member] | Residential [Member] | Substandard Nonaccrual [Member]
Loans		577
Real Estate Portfolio Segment [Member] | Residential [Member] | Doubtful [Member]
Loans	173
Real Estate Portfolio Segment [Member] | Commercial [Member]
Loans	173,999	172,248
Real Estate Portfolio Segment [Member] | Commercial [Member] | Pass [Member]
Loans	165,760	171,369
Real Estate Portfolio Segment [Member] | Commercial [Member] | Special Mention [Member]
Loans	7,386
Real Estate Portfolio Segment [Member] | Commercial [Member] | Substandard [Member]
Loans	644	543
Real Estate Portfolio Segment [Member] | Commercial [Member] | Substandard Nonaccrual [Member]
Loans	209	336
Real Estate Portfolio Segment [Member] | Commercial [Member] | Doubtful [Member]
Loans
Commercial Industrial and Agricultural Portfolio Segment [Member]
Loans	61,197	59,809
Commercial Industrial and Agricultural Portfolio Segment [Member] | Pass [Member]
Loans	59,042	59,120
Commercial Industrial and Agricultural Portfolio Segment [Member] | Special Mention [Member]
Loans	1,249	78
Commercial Industrial and Agricultural Portfolio Segment [Member] | Substandard [Member]
Loans	503	600
Commercial Industrial and Agricultural Portfolio Segment [Member] | Substandard Nonaccrual [Member]
Loans	379	11
Commercial Industrial and Agricultural Portfolio Segment [Member] | Doubtful [Member]
Loans	24
Equity Lines Portfolio Segment [Member]
Loans	28,835	29,956
Equity Lines Portfolio Segment [Member] | Pass [Member]
Loans	28,536	29,956
Equity Lines Portfolio Segment [Member] | Special Mention [Member]
Loans
Equity Lines Portfolio Segment [Member] | Substandard [Member]
Loans	299
Equity Lines Portfolio Segment [Member] | Substandard Nonaccrual [Member]
Loans
Equity Lines Portfolio Segment [Member] | Doubtful [Member]
Loans
Consumer Portfolio Segment [Member]
Loans	7,693	7,668
Consumer Portfolio Segment [Member] | Pass [Member]
Loans	7,658	7,668
Consumer Portfolio Segment [Member] | Special Mention [Member]
Loans
Consumer Portfolio Segment [Member] | Substandard [Member]
Loans
Consumer Portfolio Segment [Member] | Substandard Nonaccrual [Member]
Loans	35
Consumer Portfolio Segment [Member] | Doubtful [Member]
Loans

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Note 5 - Other Real Estate Owned - Foreclosed Properties Valuation Allowance (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Other Real Estate Owned, balance at the beginning of the year	$ 4,619	$ 5,657
Other Real Estate Owned, Additions	1,024	481
Other Real Estate Owned, Writedowns
Other Real Estate Owned, Sales	(1,597)	(1,519)
Other Real Estate Owned, balance at the end of the year	4,046	4,619
Valuation Allowance, balance at the beginning of the year	(825)	(420)
Valuation Allowance, Additions
Valuation Allowance, Writedowns	(588)	(405)
Valuation Allowance, Sales	616
Valuation Allowance, Balance at the end of the year	(797)	(825)
Balance at the beginning of the year, net	3,794	5,237
Additions, Net	1,024	481
Writedowns, Net	(588)	(405)
Sales, Net	(981)	(1,519)
Balance at the end of the year, net	$ 3,249	$ 3,794

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Note 5 - Other Real Estate Owned - Classification of Other Real Estate Owned and Expenses (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Other Real Estate Owned	$ 3,249	$ 3,794	$ 5,237
Net (gain)/loss on sales	(7)	90
Provision for unrealized losses	588	405
Other real estate owned expense	106	97
Total Other Real Estate Owned	687	592
Residential Lots [Member]
Other Real Estate Owned	1,745	2,234
Residential Development [Member]
Other Real Estate Owned		423
Residential Real Estate [Member]
Other Real Estate Owned	1,024
Commercial Lots [Member]
Other Real Estate Owned	90	90
Commercial Buildings [Member]
Other Real Estate Owned	$ 390	$ 1,047

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Note 6 - Property and Equipment (Details Textual) $ in Thousands	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Depreciation, Depletion and Amortization	$ 726	$ 754
Occupancy and Equipment Expense [Member]
Operating Leases, Rent Expense, Net	$ 304	$ 307
Home Town Residential Mortgage LLC [Member] | Roanoke [Member]
Lessee, Operating Lease, Term of Contract	1 year
Home Town Residential Mortgage LLC [Member] | Christianburg [Member]
Lessee, Operating Lease, Term of Contract	1 year
Main Office [Member]
Lessee, Operating Lease, Term of Contract	10 years
Lessee Leasing Arrangements, Operating Leases, Number of Additional Renewal Terms	1
Lessee, Operating Lease, Renewal Term	10 years
Maximum Rental Increase	3.00%
Branch Location [Member]
Lessee, Operating Lease, Term of Contract	10 years
Lessee Leasing Arrangements, Operating Leases, Number of Additional Renewal Terms	2
Lessee, Operating Lease, Renewal Term	5 years
Automated Teller Machine [Member]
Lessee, Operating Lease, Term of Contract	8 years
Lessee Leasing Arrangements, Operating Leases, Number of Additional Renewal Terms	2
Maximum Rental Increase	3.00%
Automated Teller Machine [Member] | Expires on April 1, 2026 [Member]
Lessee, Operating Lease, Renewal Term	5 years
Automated Teller Machine [Member] | Expires on April 1, 2031 [Member]
Lessee, Operating Lease, Renewal Term	5 years

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Note 6 - Property and Equipment - Components of Property and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Property and equipment	$ 17,694	$ 18,862
Less accumulated depreciation and amortization	4,757	5,491
Property and equipment, net	12,937	13,371
Land [Member]
Property and equipment	4,309	4,309
Building and Building Improvements [Member]
Property and equipment	8,617	8,617
Leasehold Improvements [Member]
Property and equipment	2,154	2,156
Furniture and Fixtures [Member]
Property and equipment	2,314	3,214
Software and Software Development Costs [Member]
Property and equipment	296	556
Construction in Progress [Member]
Property and equipment	$ 4	$ 10

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Note 6 - Property and Equipment - Minimum Annual Lease Payments (Details) $ in Thousands	Dec. 31, 2017 USD ($)
2018	$ 288
2019	274
2020	274
2021	268
2022	270
Thereafter	875
Total	$ 2,249

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Note 7 - Deposits (Details Textual) - USD ($) xbrli-pure in Thousands, $ in Millions	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Time Deposits, at or Above FDIC Insurance Limit	$ 8.3	$ 9.8
Interest-bearing Domestic Deposit, Brokered	$ 33.1	$ 28.5
Deposits, Total [Member] | Customer Concentration Risk [Member]
Concentration Risk, Percentage	0.00%

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Note 7 - Deposits - Scheduled Maturities of Time Deposits (Details) $ in Thousands	Dec. 31, 2017 USD ($)
2018	$ 76,524
2019	27,215
2020	14,492
2021	6,355
2022 and thereafter	6,878
Total	$ 131,464

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Note 8 - Federal Home Loan Bank Borrowings (Details Textual) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Advances from Federal Home Loan Banks	$ 11,028	$ 8,000
Real Estate Loans [Member]
Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures, Collateral Pledged	21,400
Investment Securities [Member]
Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures, Collateral Pledged	103
Federal Home Loan Bank Stock [Member]
Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures, Collateral Pledged	967
Federal Home Loan Bank of Atlanta [Member]
Advances from Federal Home Loan Banks	11,000	$ 8,000
Federal Home Loan Bank of Atlanta [Member] | Fixed Rate Advance [Member]
Advances from Federal Home Loan Banks	$ 11,000

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Note 8 - Federal Home Loan Bank Borrowings - Federal Home Loan Bank of Atlanta Borrowings (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Current rate
Federal Home Loan Bank Borrowings	$ 11,028	$ 8,000
Federal Home Loan Bank of Atlanta [Member] | Advance Date January 14, 2015 [Member]
Current rate	1.09%
Federal Home Loan Bank Borrowings	$ 4,000	4,000
Federal Home Loan Bank of Atlanta [Member] | Advance Date August 19, 2016 [Member]
Current rate	2.535%
Federal Home Loan Bank Borrowings	$ 4,000	4,000
Federal Home Loan Bank of Atlanta [Member] | Advance Date January 3, 2017 [Member]
Current rate	1.50%
Federal Home Loan Bank Borrowings	$ 695
Federal Home Loan Bank of Atlanta [Member] | Advance Date February 3, 2017 [Member]
Current rate	1.49%
Federal Home Loan Bank Borrowings	$ 722
Federal Home Loan Bank of Atlanta [Member] | Advance Date May 3, 2017 [Member]
Current rate	1.58%
Federal Home Loan Bank Borrowings	$ 1,611

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Note 9 - Subordinated Notes (Details Textual) - Subordinated Debt [Member] - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 18, 2015
Debt Instrument, Face Amount	$ 7,500	$ 7,500	$ 7,500
Debt Instrument, Interest Rate, Stated Percentage			6.75%
Debt Instrument, Interest Rate, Effective Percentage	7.41%	7.44%

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Note 9 - Subordinated Notes - Schedule of Subordinated Notes (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 18, 2015
Subordinated notes	$ 7,254	$ 7,224
Subordinated Debt [Member]
Principal	7,500	7,500	$ 7,500
Unamortized debt issuance costs	246	276
Subordinated notes	$ 7,254	$ 7,224

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Note 10 - Other Borrowings (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Short-term Debt	$ 1,558	$ 1,117
Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	5,000
Short-term Debt	$ 1,558	665
Line of Credit [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	2.75%
Federal Funds Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 36,500
Short-term Debt	0	$ 0
Promontory’s Insured Cash Sweep Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10,000
Promontory’s Insured Cash Sweep Line of Credit [Member] | London Interbank Offered Rate (LIBOR) [Member] | Minimum [Member]
Debt Instrument, Basis Spread on Variable Rate	0.11%
Promontory’s Insured Cash Sweep Line of Credit [Member] | London Interbank Offered Rate (LIBOR) [Member] | Maximum [Member]
Debt Instrument, Basis Spread on Variable Rate	0.20%

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Note 10 - Other Borrowings - Short Term Borrowings (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Short-term borrowings	$ 1,558	$ 1,117
Weighted average interest rate at December 31	4.11%	2.07%
Securities Sold under Agreements to Repurchase [Member]
Short-term borrowings		$ 452
Line of Credit [Member]
Short-term borrowings	$ 1,558	$ 665

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Note 11 - Fair Value Measurements (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Liabilities, Fair Value Disclosure, Nonrecurring	$ 0	$ 0
Minimum [Member]
Federal Funds Maturity	1 day
Maximum [Member]
Federal Funds Maturity	3 days

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Note 11 - Fair Value Measurements - Fair Value of Financial Assets and Liabilities Measured on Recurring Basis (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Available-for-sale securities	$ 55,344	$ 52,975
US Government Agencies Debt Securities [Member]
Available-for-sale securities	13,435	12,444
US Government Agencies Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities	13,435	12,444
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Available-for-sale securities	23,981	19,768
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities	23,981	19,768
Corporate Debt Securities [Member]
Available-for-sale securities	7,067	5,066
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities	7,067	5,066
US States and Political Subdivisions Debt Securities [Member]
Available-for-sale securities	10,861	15,697
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-sale securities	$ 10,861	$ 15,697

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Note 11 - Fair Value Measurements - Fair Value of Financial Assets and Liabilities Measure on Non-recurring Basis (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Loans held for sale	$ 1,587	$ 678
Other real estate owned	3,249	3,794	$ 5,237
Impaired loans, net of valuation allowance		98
Fair Value, Inputs, Level 2 [Member]
Loans held for sale	1,587	678
Other real estate owned
Impaired loans, net of valuation allowance
Fair Value, Inputs, Level 3 [Member]
Loans held for sale
Other real estate owned	$ 3,249	3,794
Impaired loans, net of valuation allowance		$ 98

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Note 11 - Fair Value Measurements - Fair Value Quantitative Information (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Other Real Estate Owned [Member] | Discounted Appraised Value [Member]
Nonrecurring assets	$ 2,254	$ 1,560
Fair value measurements, range
Fair value measurements, range
Other Real Estate Owned [Member] | Discounted Appraised Value [Member] | Minimum [Member]
Fair value measurements, range	6.00%	6.00%
Fair value measurements, range	0.00%	4.00%
Other Real Estate Owned [Member] | Discounted Appraised Value [Member] | Maximum [Member]
Fair value measurements, range	10.00%	6.00%
Fair value measurements, range	43.00%	12.00%
Other Real Estate Owned [Member] | Discounted Appraised Value [Member] | Weighted Average [Member]
Fair value measurements, range	8.00%	6.00%
Fair value measurements, range	7.00%	10.00%
Other Real Estate Owned [Member] | Internal Evaluations [Member]
Nonrecurring assets	$ 995	$ 2,234
Fair value measurements, range
Other Real Estate Owned [Member] | Internal Evaluations [Member] | Minimum [Member]
Fair value measurements, range	19.00%	4.00%
Other Real Estate Owned [Member] | Internal Evaluations [Member] | Maximum [Member]
Fair value measurements, range	19.00%	54.00%
Other Real Estate Owned [Member] | Internal Evaluations [Member] | Weighted Average [Member]
Fair value measurements, range	19.00%	24.00%
Impaired Loans [Member] | Discounted Appraised Value [Member]
Impaired loans		$ 98
Impaired Loans [Member] | Discounted Appraised Value [Member] | Minimum [Member]
Fair value measurements, range		6.00%
Impaired Loans [Member] | Discounted Appraised Value [Member] | Maximum [Member]
Fair value measurements, range		6.00%
Impaired Loans [Member] | Discounted Appraised Value [Member] | Weighted Average [Member]
Fair value measurements, range		6.00%

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Note 11 - Fair Value Measurements - Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Financial assets
Securities available for sale	$ 55,344	$ 52,975
Financial liabilities
FHLB borrowings	11,028	8,000
Reported Value Measurement [Member]
Financial assets
Cash and due from banks	21,714	18,229
Federal funds sold	180	42
Securities available for sale	55,344	52,975
Restricted equity securities	2,371	2,213
Loans held for sale	1,587	678
Loans, net	440,437	415,355
Bank owned life insurance	8,669	7,469
Accrued income	2,681	2,289
Financial liabilities
Total deposits	477,320	450,848
FHLB borrowings	11,028	8,000
Subordinated notes	7,254	7,224
Other borrowings	1,558	1,117
Accrued interest payable	368	386
Estimate of Fair Value Measurement [Member]
Financial assets
Cash and due from banks	21,714	18,239
Federal funds sold	180	42
Securities available for sale	55,344	52,975
Restricted equity securities	2,371	2,213
Loans held for sale	1,587	678
Loans, net	438,449	415,039
Bank owned life insurance	8,669	7,469
Accrued income	2,681	2,289
Financial liabilities
Total deposits	477,599	451,385
FHLB borrowings	11,150	8,031
Subordinated notes	7,890	8,012
Other borrowings	1,558	1,117
Accrued interest payable	368	386
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Financial assets
Cash and due from banks	21,714	17,479
Federal funds sold	180	42
Securities available for sale
Restricted equity securities
Loans held for sale
Loans, net
Bank owned life insurance
Accrued income
Financial liabilities
Total deposits
FHLB borrowings
Subordinated notes
Other borrowings
Accrued interest payable
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 2 [Member]
Financial assets
Cash and due from banks		760
Federal funds sold
Securities available for sale	55,344	52,975
Restricted equity securities	2,371	2,213
Loans held for sale	1,587	678
Loans, net
Bank owned life insurance	8,669	7,469
Accrued income	2,681	2,289
Financial liabilities
Total deposits	477,599	451,385
FHLB borrowings	11,150	8,031
Subordinated notes	7,890	8,012
Other borrowings	1,558	1,117
Accrued interest payable	368	386
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Financial assets
Cash and due from banks
Federal funds sold
Securities available for sale
Restricted equity securities
Loans held for sale
Loans, net	438,449	415,039
Bank owned life insurance
Accrued income
Financial liabilities
Total deposits
FHLB borrowings
Subordinated notes
Other borrowings
Accrued interest payable

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Note 12 - Earnings Per Common Share (Details Textual) - shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	38,500	190,531

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Note 12 - Earnings Per Common Share - Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Earnings per common share, basic, weighted average common shares outstanding (in shares)	5,769,752	4,652,853	[1]
Convertible preferred stock, weighted average common shares outstanding (in shares)		1,112,970
Dilutive stock options, weighted average common shares outstanding (in shares)	34,630	10,469
Earnings per common share, diluted, weighted average common shares outstanding (in shares)	5,804,382	5,776,292	[1]
Earnings per common share, basic, net income	$ 2,496	$ 2,111
Earnings per common share, diluted, net income	$ 2,496	$ 2,111
Earnings per common share, basic (in dollars per share)	$ 0.43	$ 0.45	[1]
Convertible preferred stock (in dollars per share)		(0.08)
Earnings per common share, diluted (in dollars per share)	$ 0.43	$ 0.37	[1]

[1] Restated for the 4% stock dividend distributed July 11, 2016

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Note 13 - Stock Based Compensation (Details Textual) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
	Jul. 11, 2016	Dec. 31, 2017	Dec. 31, 2016		Apr. 20, 2006
Allocated Share-based Compensation Expense		$ 148	$ 147
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		0	0
Dividends, Common Stock, Stock, Percentge	4.00%
Employee Stock Option [Member]
Allocated Share-based Compensation Expense		$ 71	$ 75
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized		$ 140
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition		2 years
Restricted Stock [Member]
Allocated Share-based Compensation Expense		$ 77	$ 72
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized		$ 216
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized		137,280
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		5 years
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value		$ 10.24	$ 9.09	[1]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period		13,258	11,149	[1]
2005 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant		0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized					550,000

[1] Restated for the 4% stock dividend distributed July 11, 2016.

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Note 13 - Stock Based Compensation - Stock Option Activity (Details) - USD ($)		12 Months Ended
		Dec. 31, 2017	Dec. 31, 2016
Granted, options outstanding (in shares)		0	0
2005 Stock Option Plan [Member]
Beginning balance, options outstanding (in shares)		201,000
Granted, options outstanding (in shares)
Exercised, options outstanding (in shares)		(4,500)
Expired, options outstanding (in shares)		(9,500)
Forfeited, options outstanding (in shares)
Ending balance, options outstanding (in shares)		187,000	201,000
Exercisable, options outstanding (in shares)		125,800
Beginning balance, weighted average exercise price (in dollars per share)		$ 7.80
Granted, weighted average exercise price (in dollars per share)
Exercised, weighted average exercise price (in dollars per share)		6.90
Expired, weighted average exercise price (in dollars per share)		(8.69)
Forfeited, weighted average exercise price (in dollars per share)
Ending balance, weighted average exercise price (in dollars per share)		7.78	$ 7.80
Exercisable, weighted average exercise price (in dollars per share)		$ 8.21
Balance, aggregate intrinsic value	[1]	$ 641,131
Exercisable, aggregate intrinsic value	[1]	$ 379,568
Balance, weighted average contractual term (Year)		5 years 226 days
Exercisable, weighted average contractual term (Year)		4 years 350 days

[1] The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2017.

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Note 13 - Stock Based Compensation - Restricted Stock Awards Activity (Details) - Restricted Stock [Member] - $ / shares		12 Months Ended
		Dec. 31, 2017	Dec. 31, 2016
Nonvested at beginning of year (in shares)	[1]	31,546	39,352
Granted (in shares)		13,258	11,149	[1]
Vested (in shares)		(11,920)	(12,167)	[1]
Forfeited (in shares)		(797)	(6,788)	[1]
Nonvested at the end of the period (in shares)		32,087	31,546	[1]
Nonvested at beginning of year, weighted-average grant date fair value (in dollars per share)	[1]	$ 7.03	$ 6
Granted, weighted-average grant date fair value (in dollars per share)		10.24	9.09	[1]
Vested, weighted-average grant date fair value (in dollars per share)		6.18	5.63	[1]
Forfeited, weighted-average grant date fair value (in dollars per share)		8.37	6.99	[1]
Nonvested at the end of the period, weighted-average grant date fair value (in dollars per share)		$ 8.63	$ 7.03	[1]

[1] Restated for the 4% stock dividend distributed July 11, 2016.

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Note 14 - Salary Continuation Plan (Details Textual) - Supplemental Executive Retirement Plan [Member] - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Salary Continuation Plan, Lifetime Payment Percentage	20.00%
Salary Continuation Plan, Base Salary Period	5 years
Salary Continuation Plan, Lifetime Payment Percentage, Additional Benefit	20.00%
Salary Continuation Plan, Base Salary Period, Additional Benefit	5 years
Deferred Compensation Arrangement with Individual, Compensation Expense	$ 357	$ 351
Other Liabilities [Member]
Deferred Compensation Liability, Current and Noncurrent	$ 1,000	$ 666

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Note 15 - Employee Benefit Plan (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Defined Contribution Plan, Employer Discretionary Contribution Amount	$ 263	$ 240
Employee First 3 Percent [Member]
Defined Contribution Plan, Employer Matching Contribution, Percent of Employees' Gross Pay	100.00%
Defined Contribution Plan, Maximum Annual Contributions Per Employee, Percent	3.00%
Employee Next 3 Percent [Member]
Defined Contribution Plan, Employer Matching Contribution, Percent of Employees' Gross Pay	50.00%
Defined Contribution Plan, Maximum Annual Contributions Per Employee, Percent	3.00%

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Note 16 - Income Taxes (Details Textual) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Income Tax Expense (Benefit), Continuing Operations, Adjustment of Deferred Tax (Asset) Liability		$ 0.1
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent		34.00%
Scenario, Forecast [Member]
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	21.00%

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Note 16 - Income Taxes - Components of Income Tax Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Current	$ 1,351	$ 1,496
Deferred	(123)	(56)
Income tax expense	$ 1,228	$ 1,440

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Note 16 - Income Taxes - Income Tax Reconciliation (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Tax at statutory federal rate	$ 1,291	$ 1,367
Tax-exempt interest income	(116)	(201)
Cash surrender value of life insurance	(68)	(63)
Incentive stock options	24	261
Tax impact from enacted change in tax rate	100
Other	(3)	76
Income tax expense	$ 1,228	$ 1,440

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Note 16 - Income Taxes - Components of Deferred Tax Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Deferred tax assets
Pre-opening expenses	$ 28	$ 62
Allowance for loan losses	528	693
Deferred compensation	215	226
Other real estate expenses	187	280
Unrealized loss on securities available for sale	38	29
Nonaccrual loan interest	9	17
Other	17	21
Deferred tax asset	1,022	1,328
Deferred tax liabilities
Property and equipment	230	305
Deferred loan fees	613	980
Other	17	13
Deferred tax liability	860	1,298
Net deferred tax asset	$ 162	$ 30

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Note 17 - Commitments and Contingencies (Details Textual) - USD ($) $ in Millions			12 Months Ended
	Jul. 01, 2016	Nov. 01, 2015	Dec. 31, 2017	Dec. 31, 2016
Restricted Cash and Cash Equivalents			$ 9.6	$ 6.6
Cash, Uninsured Amount			5.9	7.2
Marketing Agreement [Member]
Purchase Obligation Term of Contract	3 years	3 years
Marketing Expense			55.0	$ 57.5
Purchase Obligation, Due in Next Twelve Months			65.0
Purchase Obligation, Due in Second Year			$ 32.5

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Note 17 - Commitments and Contingencies - Commitments (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Standby Letters of Credit [Member]
Standby letters of credit	$ 6,711	$ 4,255
Commitments to Extend Credit [Member]
Commitments to extend credit	$ 109,285	$ 102,277

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Note 18 - Regulatory Restrictions (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Jan. 01, 2017	Jan. 01, 2016
Retained Earnings, Unappropriated	$ 3,800
Dividends, Cash	$ 0	$ 0
Capital Conservation Buffer Required for Capital Adequacy				2.50%
Common Equity Tier One Risk Based Capital Required for Capital Adequacy to Risk Weighted Assets	5.75%	5.125%	5.75%	5.125%
Tier One Risk Based Capital Required for Capital Adequacy to Risk Weighted Assets	7.25%	6.625%	7.25%	6.625%
Capital Required for Capital Adequacy to Risk Weighted Assets	9.25%	8.625%	9.25%	8.625%
Tier One Leverage Capital Required for Capital Adequacy to Average Assets	4.00%	4.00%	4.00%

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Note 18 - Regulatory Matters - Compliance With Regulatory Capital Requirements Under Banking Regulations (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Jan. 01, 2017	Dec. 31, 2016	Jan. 01, 2016
Total Capital (to Risk-weighted Assets), Actual, Amount	$ 61,257		$ 58,436
Tier I Common Equity (to Risk-Weighted Assets), Actual, Amount	57,474		54,783
Tier I Capital (to Risk-Weighted Assets), Actual, Amount	57,499		54,800
Tier I Capital (to Average Assets), Actual, Amount	$ 57,499		$ 54,800
Total Capital (to Risk-weighted Assets), Actual, Ratio	12.48%		12.59%
Tier I Common Equity (to Risk-Weighted Assets), Actual, Ratio	11.71%		11.80%
Tier I Capital (to Risk-Weighted Assets), Actual, Ratio	11.72%		11.80%
Tier I Capital (to Average Assets), Actual, Ratio	10.39%		10.67%
Total Capital (to Risk-weighted Assets), for Capital Adequacy, Amount	$ 45,403		$ 40,045
Tier I Common Equity (to Risk-Weighted Assets), for Capital Adequacy, Amount	28,222		23,795
Tier I Capital (to Risk-Weighted Assets), for Capital Adequacy, Amount	35,569		30,759
Tier I Capital (to Average Assets), for Capital Adequacy, Amount	$ 22,136		$ 20,537
Total Capital (to Risk-weighted Assets), for Capital Adequacy, Ratio	9.25%	9.25%	8.625%	8.625%
Tier I Common Equity (to Risk-Weighted Assets), for Capital Adequacy, Ratio	5.75%	5.75%	5.125%	5.125%
Tier I Capital (to Risk-Weighted Assets), for Capital Adequacy, Ratio	7.25%	7.25%	6.625%	6.625%
Tier I Capital (to Average Assets), for Capital Adequacy, Ratio	4.00%	4.00%	4.00%
Total Capital (to Risk-weighted Assets), to Be Well Capitalized, Amount	$ 49,084		$ 46,429
Tier I Common Equity (to Risk-Weighted Assets), to Be Well Capitalized, Amount	31,903		30,179
Tier I Capital (to Risk-Weighted Assets), to Be Well Capitalized, Amount	39,248		37,143
Tier I Capital (to Average Assets), to Be Well Capitalized, Amount	$ 27,670		$ 25,671
Total Capital (to Risk-weighted Assets), to Be Well Capitalized, Ratio	10.00%		10.00%
Tier I Common Equity (to Risk-Weighted Assets), to Be Well Capitalized, Ratio	6.50%		6.50%
Tier I Capital (to Risk-Weighted Assets), to Be Well Capitalized, Ratio	8.00%		8.00%
Tier I Capital (to Average Assets), to Be Well Capitalized, Ratio	5.00%		5.00%

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Note 19 - Transactions With Related Parties (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Loans and Leases Receivable, Related Parties, Proceeds	$ 4,637	$ 4,191
Related Party Deposit Liabilities	$ 12,500	16,700
Loans Removed from Related Party Disclosure [Member]
Loans and Leases Receivable, Related Parties, Proceeds		$ 575

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Note 19 - Transactions With Related Parties - Loan Transactions With Related Parties (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Balance, beginning	$ 8,194	$ 7,124
New loans	392	5,261
Repayments	(4,637)	(4,191)
Balance, ending	$ 3,949	$ 8,194

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Note 20 - Capital Transactions (Details Textual) - USD ($)					12 Months Ended
	Jul. 11, 2016	Jun. 29, 2016	May 10, 2016	Jun. 28, 2013	Dec. 31, 2016	Dec. 31, 2015
Dividends, Common Stock, Stock, Percentge	4.00%
Common Stock Dividends, Shares	134,177
Series C Preferred Stock [Member]
Common Stock Dividends, Shares			87,037
Dividends, Preferred Stock, Paid-in-kind					$ 408,000
Conversion of Stock, Shares Converted		13,600				400
Conversion of Stock, Shares Issued		2,176,000				64,000
Private Placement [Member]
Sale of Stock, Consideration Received on Transaction				$ 14,000,000
Private Placement [Member] | Series C Preferred Stock [Member]
Sale of Stock, Number of Shares Issued in Transaction				14,000
Preferred Stock, Dividend Rate, Percentage				6.00%
Sale of Stock, Price Per Share				$ 1,000
Debt Instrument, Convertible, Conversion Price				$ 6.25

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Note 21 - Reclassifications Out of Other Comprehensive Income - Items Reclassified to Net Income (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Tax expense related to realized gains on securities sold	$ 1,228	$ 1,440
Net income	2,496	2,519
Accumulated Net Investment Gain (Loss) Attributable to Parent [Member] | Reclassification out of Accumulated Other Comprehensive Income [Member]
Realized gains on sales of securities held for sale during the period	69	257
Tax expense related to realized gains on securities sold	24	87
Net income	$ 45	$ 170

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Note 22 - Condensed Parent Company Financial Information - Condensed Balance Sheets (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Assets
Cash and due from banks	$ 21,714	$ 18,229
Other assets	1,084	875
Total assets	550,253	517,290
Liabilities and Stockholders’ Equity
Other liabilities	1,833	1,490
Subordinated notes	7,254	7,224
Total liabilities	499,361	469,065
Stockholders’ equity:
Total stockholders’ equity	50,383	47,789
Total liabilities and stockholders’ equity	550,253	517,290
Parent Company [Member]
Assets
Cash and due from banks	313	298
Investment in bank subsidiary	57,333	54,727
Other assets	3
Total assets	57,649	55,025
Liabilities and Stockholders’ Equity
Other liabilities	12	12
Subordinated notes	7,254	7,224
Total liabilities	7,266	7,236
Stockholders’ equity:
Total stockholders’ equity	50,383	47,789
Total liabilities and stockholders’ equity	$ 57,649	$ 55,025

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Note 22 - Condensed Parent Company Financial Information - Condensed Statements of Income (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Interest expense	$ 3,046	$ 3,018
Other expense	1,839	1,517
Net income before income taxes	3,797	4,021
Income tax benefit	(1,228)	(1,440)
Net income attributable to HomeTown Bankshares Corporation	2,496	2,519
Parent Company [Member]
Dividend from Bank subsidiary	511
Income	511
Interest expense	537	536
Other expense	272	302
Expenses	809	838
Net income before income taxes	(298)	(838)
Income tax benefit	275	278
Net loss before equity in undistributed net income of subsidiary	(23)	(560)
Undistributed net income of subsidiary	2,519	3,079
Net income attributable to HomeTown Bankshares Corporation	$ 2,496	$ 2,519

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Note 22 - Condensed Parent Company Financial Information - Condensed Statements of Cash Flows (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income	$ 2,496	$ 2,519
Amortization of discount on subordinated notes	30	30
Other assets	(53)	96
Decrease in interest payable	(18)	14
Decrease in other liabilities	343	229
Net cash flows provided by operating activities	4,240	6,268
Cash flows from financing activities:
Exercise of stock options	31
Net cash flows provided by financing activities	29,952	35,616
Net increase (decrease) in cash and cash equivalents	3,485	(10,516)
Cash and cash equivalents, beginning	18,229	28,745
Cash and cash equivalents, ending	21,714	18,229
Supplemental disclosure of cash flow information:
Cash payments for interest	3,064	2,974
Parent Company [Member]
Cash flows from operating activities:
Net income	2,496	2,519
Equity in undistributed net income of subsidiary bank	(2,519)	(3,079)
Amortization of discount on subordinated notes	30	30
Other assets	(3)	7
Decrease in interest payable		(18)
Decrease in other liabilities		(295)
Net cash flows provided by operating activities	4	(836)
Cash flows from financing activities:
Preferred dividend payment		(408)
Exercise of stock options	31
Net settlement of vested restricted stock	(20)	(29)
Cash in lieu of fractional shares		(5)
Net cash flows provided by financing activities	11	(442)
Net increase (decrease) in cash and cash equivalents	15	(1,278)
Cash and cash equivalents, beginning	298	1,576
Cash and cash equivalents, ending	313	298
Supplemental disclosure of cash flow information:
Cash payments for interest	$ 506	$ 554