Second QUARTER 2013 UPDATE www.hometownbankva.com l 540.345.6000 Lobby Hours: Monday Friday 7am 7pm l Saturday 9am - 2pm
A MESSAGE FROM OUR Chairman A MESSAGE FROM OUR PRESIDENT Dear Shareholders and Friends: I recently asked myself, Just what is a community bank? This question occurred to me because of an advertisement I saw by one of the four largest banks in the country, which portrayed itself as a community bank and referred to its employees as community bankers. My immediate reaction was, NO WAY ; just because a bank has a local presence doesn t make it a local, community bank. The attributes of a community bank are appealing, and I can understand that even large banks want to be identified as a community-focused bank. However, the large national and regional banks have none of the generally accepted characteristics of a community bank local management and decision making (board and executive officers), substantial local ownership, limited size and limited geography served. Most people are able to articulate the characteristics of community banks, as the characteristics revolve around how and where a community bank conducts business. A community bank is a financial institution with a strategic business plan to recycle deposits into loans within the same communities where the deposits were gathered. This philosophy encourages a vibrant, growing local economy and ensures that the growth of a community is not restricted to an allotment of loans predetermined by the managers of national or regional banks with little knowledge of or interest in the local economy. In the FDIC Community Banking Study published in December 2012, it is pointed out that community banks focus on providing traditional banking services in their local communities, where they obtain their deposits and make their loans. For this reason, they are often called relationship bankers as opposed to transactional bankers... they have specialized knowledge of their local community and their customers. The Study continued, Community banks can develop these close relationships with customers because they tend to be smaller in size and only conduct business locally. The larger the institution, and the more places it does business, the more difficult it is to manage relationships at a personal level. The FDIC Study reports there are 6,914 U.S. banking organizations, and 6,194 are designated community banks. Most have assets of $1 billion or less, although a few were classified as community banks with assets over $1 billion because they possess the community bank characteristics relating to limited geographical coverage and local management. Surprisingly, 31.2 percent of all U.S. banks have assets under $100 million. Although community banks comprise just 10 percent of banking industry assets, community banks provide nearly 60 percent of loans to small businesses. It has been argued that there will be further consolidation in the banking industry over the next several years and that the number of U.S. banks will be reduced to fewer than 5,000. One would have to think that much of any such consolidation will involve the smaller banks. It is hard to understand how a bank with assets under $100 million can generate sufficient revenue to absorb the continually increasing regulatory/compliance costs imposed on banks. In the past, de novo banks were formed which offset many of the mergers which took place. However, in a recent conversation with the Virginia Commissioner of Banking, it was confirmed that no new banks have been chartered in Virginia in the last few years, and he doesn t see that trend changing in the foreseeable future. My point is this: the community bank model is a good one and will continue to attract local businesses away from the large national and regional banks because those large institutions, managed from afar, cannot deliver the service that local small and mid-size businesses want. I believe HomeTown Bank, with its superior service and personnel, will continue to be a leader among community banks in its markets and will continue to benefit from this migration from the big banks. In my quarterly message last fall, I suggested that community banks in general, and HomeTown Bank in particular, would regain favor with investors. Clearly that is occurring. HomeTown s share price has increased by 54 percent so far this year. And, in my opinion, the share price still has a long way to go to reach historic levels for well-run and profitable community banks. At current price levels, HomeTown s shares are still trading at a substantial discount to book value. Sincerely, William R. Rakes Chairman Dear Shareholders and Friends: We are pleased to report record earnings for the second quarter of 2013 with a 120% increase in year-to-date earnings from operations through the first half of 2013. The Company earned net income of $642,000 in the second quarter of 2013 vs. $95,000 for the 2nd quarter of 2012. Year-to-date earnings from operations for the first half of 2013 were $1.17 million or $0.26 per diluted common share vs. $530,000 or $0.07 per diluted share in 2012. For comparison purposes, the 2012 results exclude the one-time deferred tax benefit of $2.93 million realized on January 1, 2012, which added $0.90 per share for total diluted earnings per share of $0.97 for the six months ended June 30, 2012. A higher net interest margin of 3.93% and stronger loan quality contributed to the record earnings for the 3-month period ended and a significant increase in year-to-date earnings from operations for the first half of 2013. A sharp increase in new checking account openings during 2013 and a corresponding increase in service charges, particularly ATM and interchange revenue attributed to checking accounts, also contributed to the record earnings. Other non-interest income enhanced earnings as well in the first half of 2013 with a record level of mortgage income from HomeTown Mortgage and a sizable increase in title insurance revenue from HomeTown Title Insurance Agency, both subsidiaries of HomeTown Bank. The opening of HomeTown Investments in April 2013 will introduce another important source of revenue for the Company in subsequent quarters and provide existing and prospective customers with diverse investment products and strong financial advisory services. Significant improvement in loan quality continued during the first half of 2013, including the following: A decrease in non-performing loans from $3.27 million or 1.25% of total loans at June 30, 2012 to $1.22 million or 0.43% of total loans at June 30, 2013. Total non-performing assets, including all non-performing loans and foreclosed properties, improved from 3.24% of total assets at June 30, 2012 to 2.47% of total assets at. The net charge-off ratio dropped significantly, from 0.98% during the first half of 2012 to 0.18% for the same period ended. A sizable decline in past-due loans over a similar period in 2012, amounting to 0.43% of total loans at vs. 1.25% at June 30, 2012. Due to the significant improvement in overall loan quality, the provision for loan losses in the first half of 2013 amounted to $125,000 vs. $1.28 million in the first half of 2012 a major contributor to the record earnings recorded for the six months ended June 30, 2013. In addition to record earnings, total assets also grew to a record level of $392 million at, up from $370 million at December 31, 2012. Total loans grew at an annualized rate of 6% from $275 million at the end of 2012 to $283 million at, while cash and overnight investments increased $17.7 million to $27.7 million due to proceeds from the Company s very successful $14 million capital raise in a convertible preferred stock offering that closed on June 28, 2013. Increased liquidity from the capital raise will provide funding during the 3rd quarter of 2013 to retire the existing $10.3 million in preferred stock outstanding at. The original preferred stock represents capital from the Company s participation in the TARP-Capital Purchase Program during the financial crisis in 2009, which the Company planned to repay prior to a significant increase in the dividend rate in 2014. In addition to our operating performance, we are also very pleased with the continued growth of our franchise. The opening of our new branch in the New River Valley in the fall of this year will provide a vibrant financial hub for our NewRiver Bank customers and prospective clients in the New River Valley, combining our branch staff with our loan production office employees under one roof. We will also begin construction of our new Salem branch during the 4th quarter of 2013, to open in the spring of 2014. Both of our new offices will provide conventional banking services as well as mortgage, insurance, and investment advisory services. We thank all of our customers and fans who continue to vote for HomeTown Bank as a Best Bank in Roanoke by the Roanoker Magazine. Please view and hear testimonials from our customers regarding our excellent customer service and popular products on our website at https://www.hometownbankva.com. As always, thank each of you for your continued support of HomeTown Bank. With best regards, Susan K. Still President & CEO, HomeTown Bankshares Corporation September 2013
Hometown Bankshares corporation Condensed Consolidated Balance Sheets and December 31, 2012 In Thousands Assets Audited December 31, 2012 Cash and due from banks $ 27,665 $ 9,812 Federal funds sold 56 196 Securities available for sale, at fair value 59,406 63,466 Restricted equity securities 2,386 2,591 Loans, net of allowance for loan losses of $4,169 in 2012 and $3,979 in 2011 278,990 271,147 Property and equipment, net 10,756 9,754 Other real estate owned 8,440 8,938 Other assets 4,162 4,547 Liabilities and Stockholders Equity Deposits Total Assets $ 391,861 $ 370,451 Non-Interest Bearing $ 35,725 $ 32,627 Interest Bearing 285,960 277,370 Total Deposits 321,685 309,997 Short term borrowings 361 216 Federal Home Loan Bank borrowings 19,000 22,000 Other liabilities 1,321 1,519 Stockholders Equity Total Liabilities $ 342,367 $ 333,732 Total Stockholders Equity $ 49,494 $ 36,719 Total Liabilities and Stockholders Equity $ 391,861 $ 370,451 Consolidated Condensed Statements of Income HomeTown Bankshares Corporation Holding Company of HomeTown Bank In Thousands Second-Quarter Earnings: Three Months Ended June 30 QTD QTD June 30, 2012 Total Interest Income $ 4,008 $ 3,912 Total Interest Expense 560 678 Net Interest Income 3,448 3,234 Provision for Loan Losses 0 1,088 Net Int. Inc. After Prov. for Loan Losses 3,448 2,146 Non-Interest Income 453 406 Non-Interest Expense 2,939 2,413 Net Income Before Income Taxes 962 139 Income Tax Expense (Benefit) 320 44 Net Income $ 642 $ 95 Dividends Accumulated on Common Stock, Net 154 152 Net Income (Loss) Available to Common Shareholders $ 488 $ (57) Net Income Per Share, Basic and Diluted $ 0.15 $ (0.02) Weighted Average Common Shares Outstanding 3,270,299 3,262,518 Year-To-Date Earnings: Six Months Ended June 30 YTD YTD June 30, 2012 Total Interest Income $ 7,873 $ 7,798 Total Interest Expense 1,130 1,471 Net Interest Income 6,743 6,327 Provision for Loan Losses 125 1,278 Net Int. Inc. After Prov. for Loan Losses 6,618 5,049 Non-Interest Income 770 668 Non-Interest Expense 5,639 4,920 Net Income Before Income Taxes 1,749 797 Income Tax Expense (Benefit) 582 (2,658) Net Income $ $1,167 $ 3,455 Dividends Accumulated on Common Stock, Net 307 304 Net Income (Loss) Available to Common Shareholders $ 860 $ 3,151 Net Income Per Share, Basic and Diluted $ 0.26 $ 0.97 Weighted Average Common Shares Outstanding 3,267,806 3,256,296 Diluted Average Common Shares Outstanding 3,304,933 3,256,296
Bank News Meet Homer and Holly! Homer and Holly are the beloved mascots of the HomeTown Bank Kids Club. The Kids Club is HomeTown Bank s newly revamped club for children 12 and younger who open a Kids Club Savings Account. The club was created to make saving money fun and teach children about the importance of saving money. Each Kids Club member receives a FREE Homer the Pig piggy bank so they can start saving immediately. Members also receive: An HTB Kids Club Membership Card A special passbook with stickers to track savings A birthday card on the member s birthday A Savings Activity Book To join the Kids Club, just go to any HomeTown Bank branch and open a Kids Club Savings Account today. A parent or guardian will need to act as custodian for the account and make any transactions or inquiries. Note to Shareholders 156 shareholders have not yet completed the process of converting their HomeTown Bank stock certificates to HomeTown Bankshares Corporation certificates. Once the process is complete, it will trigger the release of the 10% stock dividend those shareholders have not yet received. If you have any questions regarding the process, please contact Debra Baliles at 540.278.1700. Opening this Fall: NewRiver Bank Construction continues in Christiansburg with the newest HomeTown Bank branch, NewRiver Bank. When complete, it will be as inviting as all the HomeTown Bank branches. Given its New River Valley location, the building s exterior utilizes a Hokie Stone material on the building s base and will proudly display art from local artists on the interior. The exterior signs are currently being installed, which will be another visible sign of our commitment to this important market. We are counting down the days until we can serve the community from this new, convenient location. In the future, if you would like to receive this newsletter electronically, please contact Debra Baliles at dbaliles@hometownbankva.com. Fall Shred Day! Mark your calendar. HomeTown Bank will be offering another Community Shred Day on October 19 at the 419/Colonial Avenue branch in Roanoke. The event will be from 10 12 and is free to the community. As a reminder, shredding documents with sensitive information, keeping your important papers secure, and limiting the personal information you carry with you are three simple ways you can protect your identity. 5-5-5 at HomeTown Bank As an enthusiastic participant in Junior Achievement s 5-5-5 program, where 5th graders are exposed to 5 career paths in 5 days, HomeTown Bank hosted over 20 students on July 10. The students learned about many career opportunities at a bank, from Marketing and IT to Human Resources and Branch management. They also got a live demonstration on how to make a money rose and were given a tour of the bank, where they were able to see the IT server room and the vault. The students were very engaged and were welcome guests to the bank. Find HomeTown Bank Va on: e-statements Many things are going paperless these days as people try to eliminate clutter or become more environmentally friendly. E-statements are FREE and contain the same information as a traditional paper statement, with added benefits: Convenient: Control when you review your statements and canceled checks anytime day or night. Safe: Your e-statement is protected by high security measures. Secure: Reduce the risk of statements being lost or stolen in the mail. Cost-effective: e-statements are one way to help lower HomeTown Bank s cost of providing services. Environmentally friendly: Stay clutter-free and conserve resources. To sign up, please visit HomeTown s online banking site or call a branch today!
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