10-Q 1 henry-10q_0511.htm QUARTERLY REPORT henry-10q_0511.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2011
 
OR
     
o
 
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 0-49789
 
Henry County Bancshares, Inc.
(Exact name of registrant as specified in its charter)
     
Georgia
 
58-1485511
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
     
4806 N. Henry Blvd., Stockbridge, Georgia
 
30281
Address of Principal Executive Offices
 
(Zip Code)
 
(770) 474-7293
(Telephone Number)
 
Indicate by check mark whether the registrant (1) has 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 þ       NO o
 
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 o       NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer  o
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller Reporting Company  þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o NO þ
 
Common stock, par value $.10 per share: 14,245,690 shares
outstanding as of April 29, 2011

 
 

 

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
 

 
INDEX

   
Page
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
 
     
     
     
 


 
 


I - FINANCIAL INFORMATION

ITEM 1.
Financial Statements

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)

   
March 31,
   
December 31,
 
(in thousands, except share and per share amounts)
 
2011
   
2010
 
             
Assets
           
             
Cash and due from banks
  $ 16,769     $ 8,812  
Interest-bearing excess Federal Reserve balances
    24,300       22,100  
Interest-bearing deposits in banks
    3,406       1,510  
Securities available for sale, at fair value
    75,349       67,215  
Securities held to maturity (fair value approximates $378 and $378)
    375       375  
Restricted equity securities, at cost
    1,194       1,194  
                 
Loans
    369,955       380,242  
Less allowance for loan losses
    8,234       10,824  
          Loans, net
    361,721       369,418  
                 
Premises and equipment
    9,017       9,034  
Foreclosed properties
    78,110       79,451  
Income taxes receivable
    266       266  
Other assets
    4,363       4,504  
          Total assets
  $ 574,870     $ 563,879  
                 
                 
Liabilities and Stockholders' Equity
               
                 
Deposits
               
    Noninterest-bearing
  $ 68,694     $ 60,047  
    Interest-bearing
    487,997       484,616  
          Total deposits
    556,691       544,663  
                 
Other borrowings
    152       755  
Other liabilities
    3,266       3,180  
          Total liabilities
    560,109       548,598  
                 
Commitments and contingencies (Note 7)
               
                 
Stockholders' equity
               
    Preferred stock, no par value; 10,000,000 shares authorized; none issued
Common stock, par value $.10; 50,000,000 shares authorized;
14,388,749.6 shares issued
    1,439       1,439  
    Capital surplus
    35,273       35,273  
    Accumulated deficit
    (20,070 )     (19,200 )
    Accumulated other comprehensive income
    438       88  
    Less cost of treasury stock, 143,060 shares
    (2,319 )     (2,319 )
          Total stockholders' equity
    14,761       15,281  
          Total liabilities and stockholders' equity
  $ 574,870     $ 563,879  

See accompanying notes to consolidated financial statements.
 
3


HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 2011 and 2010
(unaudited)
 
(in thousands, except share and per share amounts)
 
2011
   
2010
 
             
Interest income
           
    Loans
  $ 3,878     $ 5,122  
    Taxable securities
    520       490  
    Nontaxable securities
    30       48  
    Deposits in banks
    2       4  
    Federal Reserve balances
    15       18  
              Total interest income
    4,445       5,682  
                 
Interest expense
               
    Deposits
    2,153       2,849  
    Other borrowings
    -       11  
              Total interest expense
    2,153       2,860  
                 
              Net interest income
    2,292       2,822  
Provision for (recovery of) loan losses
    7       (2,876 )
              Net interest income after provision for (recovery of) loan losses
    2,285       5,698  
                 
Other operating income
               
    Service charges on deposit accounts
    422       443  
    Other service charges and fees
    208       200  
    Securities gains, net
    -       813  
    Mortgage banking income
    -       13  
              Total other operating income
    630       1,469  
                 
Other expenses
               
    Salaries and employee benefits
    1,326       1,339  
    Occupancy and equipment expenses
    374       377  
    Nonperforming assets, net
    1,031       428  
    FDIC and regulatory
    645       387  
    Other operating expenses
    409       467  
              Total other expenses
    3,785       2,998  
                 
              Earnings (loss) before income taxes
    (870 )     4,169  
                 
Income tax expense (benefit)
    -       -  
                 
              Net earnings (loss)
  $ (870 )   $ 4,169  
                 
Earnings (loss) per share
  $ (0.06 )   $ 0.29  
                 
Weighted average shares outstanding
    14,245,690       14,245,690  

See accompanying notes to consolidated financial statements.
 
4



HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2011 and 2010
(unaudited)
 
(in thousands)
 
2011
   
2010
 
             
Net earnings (loss)
  $ (870 )   $ 4,169  
                 
Other comprehensive income (loss):
               
                 
Unrealized holding gains (losses) on investment securities available for sale arising during period
    350       (64 )
                 
Reclassification adjustment for gains on sale of securities available for sale realized in net earnings
    -       (813 )
                 
Total other comprehensive income (loss)
    350       (877 )
                 
Total comprehensive income (loss)
  $ (520 )   $ 3,292  

See accompanying notes to consolidated financial statements.
 
 
5



HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2011
(unaudited)
 
                       Accumulated              
                       Other            Total  
   
Common
   
Capital
   
Accumulated
   
Comprehensive
   
Treasury
   
Stockholders'
 
(in thousands)
 
Stock
   
Surplus
   
Deficit
   
Income
   
Stock
   
Equity
 
                                     
Balance, December 31, 2010
  $ 1,439     $ 35,273     $ (19,200 )   $ 88     $ (2,319 )   $ 15,281  
    Net loss
    -       -       (870 )     -       -       (870 )
    Other comprehensive income
    -       -       -       350       -       350  
Balance, March 31, 2011
  $ 1,439     $ 35,273     $ (20,070 )   $ 438     $ (2,319 )   $ 14,761  

See accompanying notes to consolidated financial statements.
 
6



HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2011 and 2010
(unaudited)
 
(in thousands)
 
2011
   
2010
 
             
Operating Activities
           
    Net earnings (loss)
  $ (870 )   $ 4,169  
    Adjustments to reconcile net earnings (loss) to net cash
               
        provided by (used in) operating activities:
               
        Depreciation
    115       121  
        Decrease in loans held for sale
    -       499  
        Provision for (recovery of) loan losses
    7       (2,876 )
        Impairment losses on foreclosed properties
    345       153  
        Gains on sale of securities available for sale
    -       (813 )
        Net losses on sale of foreclosed properties
    9       111  
        (Increase) decrease in interest receivable
    (40 )     214  
        Decrease in interest payable
    (271 )     (623 )
        Net other operating activities
    538       (241 )
              Net cash provided by (used in) operating activities
    (167 )     714  
                 
Investing Activities
               
    Purchases of securities available for sale
    (15,959 )     (15,708 )
    Proceeds from maturities of securities available for sale
    8,175       14,624  
    Proceeds from sale of securities available for sale
    -       20,327  
    Net increase in excess Federal Reserve balances
    (2,200 )     (4,700 )
    Net increase in interest-bearing deposits in banks
    (1,896 )     (3,315 )
    Net decrease in loans
    8,629       3,402  
    Additions to foreclosed properties
    (41 )     (27 )
    Proceeds from sale of foreclosed properties
    89       1,418  
    Purchase of premises and equipment
    (98 )     -  
              Net cash provided by (used in) investing activities
    (3,301 )     16,021  
                 
Financing Activities
               
    Net increase (decrease) in deposits
    12,028       (16,644 )
    Net repayments of other borrowings
    (603 )     (159 )
              Net cash provided by (used in) financing activities
    11,425       (16,803 )
                 
Net increase (decrease) in cash and due from banks
    7,957       (68 )
                 
Cash and due from banks, beginning of period
    8,812       11,887  
                 
Cash and due from banks, end of period
  $ 16,769     $ 11,819  

See accompanying notes to consolidated financial statements.
 
 
7



HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2011 and 2010
(unaudited)

(in thousands)
 
2011
   
2010
 
             
Supplemental Disclosures of Cash Flow Information
           
             
    Cash paid for:
           
        Interest
  $ 2,424     $ 3,483  
                 
    Noncash transactions
               
        Other real estate acquired in settlement of loans
  $ -     $ 13,047  
        Financed sales of foreclosed properties
  $ 939     $ -  
 
See accompanying notes to consolidated financial statements.
 
8

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1)
BASIS OF PRESENTATION

The consolidated financial information for Henry County Bancshares, Inc. (the “Company”) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period.
The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.
 
2)
RECENT OPERATING LOSSES AND IMPACT ON CAPITAL

The Company has been adversely impacted by the continuing deterioration of the Metropolitan Atlanta real estate market causing continuing losses at the Bank, resulting in the Bank being deemed significantly undercapitalized.  On May 14, 2010, the Bank entered into a Stipulation and Consent Agreement with the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “Department”) (collectively, the “Supervisory Authorities”) agreeing to the issuance of a Consent Order (the “Order”).  The Order stipulates, among other conditions, that the Bank reach and maintain a Tier 1 capital ratio equal to or exceeding 8%.  There is no assurance that the Bank’s capital can be increased to the level required by the Supervisory Authorities.  Also, should the Bank’s capital not be increased to the level set forth in the Order, it is uncertain what action the Supervisory Authorities will take.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of the Bank not having adequate capital or liquidity to continue to operate or from any extraordinary regulatory action, either of which would affect its ability to continue as a going concern.  Management of the Company has taken certain steps in an effort to continue with safe and sound banking practices.
 
 
9

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
2)
RECENT OPERATING LOSSES AND IMPACT ON CAPITAL, continued
 
Actions have been initiated to mitigate lending exposure, strengthen the loan portfolio, and protect the Bank’s collateral interests, as well as to reduce operating costs.  Notwithstanding these efforts, the Bank sustained a net loss for 2010 of $6,709,000 and also incurred a net loss of $870,000 for the three months ended March 31, 2011, primarily the result of expenses related to nonperforming assets and regulatory costs.

The Capital Committee of the Board of Directors continues to review various alternatives for increasing the Bank’s capital and on January 20, 2011 the Company began a common stock offering through a private placement memorandum to raise a minimum of $50 million and a maximum of $75 million in additional capital with the majority of any capital raised to be contributed to the Bank.  However, there can be no assurance that this offering of common stock will be successful.  As of March 31, 2011, no subscriptions have been received for purchase of new common stock.

3)
ACCOUNTING STANDARDS UPDATES
 
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”).  ASU No. 2010-20 requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Existing disclosures were amended to require a rollforward of the allowance for loan losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans.  Nonaccrual and impaired loans by class must also be shown.  ASU No. 2010-20 also requires disclosures regarding: 1) credit quality indicators by class, 2) aging of past due loans by class, 3) troubled debt restructurings (“TDRs”) by class and their effect on the allowance for loan losses, 4) defaults on TDRs by class and their effect on the allowance for loan losses, and 5) significant purchases and sales of loans disaggregated by portfolio segment.  This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period type disclosures.  Activity related disclosures are effective for interim and annual reporting periods beginning on or after December 15, 2010.  ASU No. 2010-20 will have an impact on the Company’s disclosures, but not its financial position or results of operations.
 
In April 2011, the FASB issued ASU No. 2011-02, which provides guidance on determining whether a restructuring of a receivable meets the criteria to be considered a TDR.  The new guidance is required to be adopted for the first interim or annual reporting period beginning after June 15, 2011, and is to be applied retrospectively to the beginning of the annual reporting period of adoption. Early adoption is permitted.  The Company intends to adopt the provisions of this ASU when required, and is evaluating its potential impact on the Company’s consolidated financial statements.
 
 
10

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
4)
SECURITIES

The amortized cost and fair value of securities are summarized as follows:
 
 
Securities Available for Sale
       
Gross
   
Gross
   
Estimated
 
     
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
(in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
                           
 
March 31, 2011:
                       
 
      U.S. Government sponsored agencies
  $ 9,752     $ 45     $ (24 )   $ 9,773  
 
      State and municipal securities
    27,298       292       (225 )     27,365  
 
      Mortgage-backed securities
    36,748       447       (97 )     37,098  
 
      Other
    1,113       -       -       1,113  
      $ 74,911     $ 784     $ (346 )   $ 75,349  
                                   
                                   
 
December 31, 2010:
                               
 
      U.S. Government sponsored agencies
  $ 8,280     $ 28     $ (51 )   $ 8,257  
 
      State and municipal securities
    23,372       158       (324 )     23,206  
 
      Mortgage-backed securities
    35,475       392       (115 )     35,752  
      $ 67,127     $ 578     $ (490 )   $ 67,215  
                                   
                                   
 
Securities Held to Maturity
         
Gross
   
Gross
   
Estimated
 
     
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
(in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
                                   
 
March 31, 2011:
                               
 
      State and municipal securities
  $ 375     $ 3     $ -     $ 378  
                                   
 
December 31, 2010:
                               
 
      State and municipal securities
  $ 375     $ 3     $ -     $ 378  
                                   
  Restricted equity securities are summarized as follows:                                
 
   
March 31,
   
December 31,
 
 
(in thousands)
 
2011
   
2010
 
             
 
Federal Home Loan Bank stock
  $ 1,194     $ 1,194  
 
 
11

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
4)
SECURITIES, continued

Securities with a carrying value of $25,292,000 at March 31, 2011 and $23,988,000 at December 31, 2010 were pledged to secure public deposits and for other purposes required or permitted by law.

The following table summarizes securities sales activity and gains for the three month periods ended March 31, 2011 and 2010:
 
   
Three months ended
 
   
March 31,
 
(in thousands)
 
2011
   
2010
 
             
Proceeds from sales
  $ -     $ 20,327  
                 
Gross gains on sale
  $ -     $ 813  
 
The amortized cost and fair value of debt securities as of March 31, 2011 by contractual maturity are shown below.  Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty.  Therefore, these securities are not included in the maturity categories in the following summary.
     
Securities Available for
   
Securities Held to
 
     
Sale
   
Maturity
 
     
Amortized
   
Estimated
   
Amortized
   
Estimated
 
 
(in thousands)
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                           
 
Due in one year or less
  $ 1,229     $ 1,242     $ 175     $ 177  
 
Due after one year through five years
    5,458       5,511       200       201  
 
Due after five years through ten years
    15,442       15,337       -       -  
 
After ten years
    16,034       16,161       -       -  
 
Mortgage-backed securities
    36,748       37,098       -       -  
      $ 74,911     $ 75,349     $ 375     $ 378  
 
 
12

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 
4)
SECURITIES, continued
 
The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Information pertaining to securities available for sale with gross unrealized losses at March 31, 2011 and December 31, 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
     
Less Than 12 Months
   
12 Months or More
 
     
Estimated
   
Unrealized
   
Estimated
   
Unrealized
 
 
(in thousands)
 
Fair Value
   
Losses
   
Fair Value
   
Losses
 
                           
 
March 31, 2011:
                       
 
    U. S. Government sponsored agencies
  $ 1,976     $ 24     $ -     $ -  
 
    State and municipal securities
    11,329       225       -       -  
 
    Mortgage-backed securities
    9,339       97       -       -  
 
        Total temporarily impaired securities
  $ 22,644     $ 346     $ -     $ -  
                                   
 
December 31, 2010:
                               
 
    U. S. Government sponsored agencies
  $ 2,960     $ 51     $ -     $ -  
 
    State and municipal securities
    10,258       324       -       -  
 
    Mortgage-backed securities
    12,537       115       -       -  
 
        Total temporarily impaired securities
  $ 25,755     $ 490     $ -     $ -  

There were no held to maturity securities with gross unrealized losses at March 31, 2011 and December 31, 2010.
 
 
13

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
4)
SECURITIES, continued
 
The unrealized losses on the Company’s investment in state and municipal securities are caused by changes in interest rates.  The Company’s investments in state and municipal securities consist primarily of general obligations of municipalities located in the state of Georgia.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011 and December 31, 2010.

The unrealized losses on the Company’s investment in both direct obligations of federal agencies and mortgage-backed securities guaranteed by federal agencies were also caused by changes in interest rates.  The contractual cash flows of those investments are guaranteed by an agency of the U.S. government.  Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011 and December 31, 2010.
 
5)
LOANS

The composition of loans is summarized as follows:
 
     
March 31,
   
December 31,
 
 
(in thousands)
 
2011
   
2010
 
               
 
Commercial
  $ 3,898     $ 4,162  
 
Commercial real estate
               
 
  Land, development and construction
    125,714       130,539  
 
  Other
    105,687       106,152  
 
  Churches
    75,088       79,706  
 
Residential real estate
    49,248       48,741  
 
Consumer
    10,328       10,955  
 
        Total
    369,963       380,255  
                   
 
Deferred loan fees
    (8 )     (13 )
 
Allowance for loan losses
    (8,234 )     (10,824 )
 
    Loans, net
  $ 361,721     $ 369,418  
 
 
14

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 
5)
LOANS, continued
 
At March 31, 2011 and December 31, 2010, interest only loans included in total commercial real estate loans were $145,365,000 and $139,196,000, respectively, and on which 98% and 97%, respectively had interest due on at least a semiannual basis.

Activity in the allowance for loan losses for the three months ended March 31, 2011 and 2010 was as follows:
 
     
2011
 
           
Commercial
   
Residential
                   
 
(in thousands)
 
Commercial
   
Real Estate
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
                                       
 
Balance, beginning of period
  $ 15     $ 9,467     $ 463     $ 107     $ 772     $ 10,824  
                                                   
 
Provision for (recovery of) loan losses
    (5 )     238       352       104       (682 )   $ 7  
                                                   
 
Loans charged off
    -       (2,217 )     (367 )     (40 )     -       (2,624 )
                                                   
 
Recoveries of loans previously charged off
    4       15       7       1       -       27  
                                                   
 
Balance, end of period
  $ 14     $ 7,503     $ 455     $ 172     $ 90     $ 8,234  
 
 
(in thousands)
 
2010
 
         
 
Balance, beginning of period
  $ 13,324  
           
 
Provision for loan losses
    (2,876 )
           
 
Loans charged off
    (131 )
           
 
Recoveries of loans previously charged off
    3,418  
           
 
Balance, end of period
  $ 13,735  
 
 
15

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 
5)
LOANS, continued
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010.
 
     
March 31, 2011
 
           
Commercial
   
Residential
                   
 
(in thousands)
 
Commercial
   
Real Estate
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
 
Allowance for loan losses:
                                   
 
Ending allowance balance attributable to loans:
                               
 
    Individually evaluated for impairment
  $ -     $ 4,081     $ 16     $ -     $ -     $ 4,097  
 
    Collectively evaluated for impairment
    14       3,422       439       172       90       4,137  
 
        Total ending allowance balance
  $ 14     $ 7,503     $ 455     $ 172     $ 90     $ 8,234  
                                                   
                                                   
 
Loans:
                                               
 
  Individually evaluated for impairment
  $ 2,014     $ 112,641     $ 13,798     $ -     $ -     $ 128,453  
 
 Collectively evaluated for impairment
    1,884       193,840       35,450       10,328       -       241,502  
 
        Total loans
  $ 3,898     $ 306,481     $ 49,248     $ 10,328     $ -     $ 369,955  
 
     
December 31, 2010
 
           
Commercial
   
Residential
                   
 
(in thousands)
 
Commercial
   
Real Estate
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
 
Allowance for loan losses:
                                   
 
Ending allowance balance attributable to loans:
                               
 
    Individually evaluated for impairment
  $ -     $ 5,754     $ 14     $ -     $ -     $ 5,768  
 
    Collectively evaluated for impairment
    15       3,713       449       107       772       5,056  
 
        Total ending allowance balance
  $ 15     $ 9,467     $ 463     $ 107     $ 772     $ 10,824  
                                                   
                                                   
 
Loans:
                                               
 
  Individually evaluated for impairment
  $ 2,014     $ 111,544     $ 10,747     $ -     $ -     $ 124,305  
 
 Collectively evaluated for impairment
    2,148       204,840       37,994       10,955       -       255,937  
 
        Total loans
  $ 4,162     $ 316,384     $ 48,741     $ 10,955     $ -     $ 380,242  
 
The Company had no loans that had been modified in Troubled Debt Restructurings (“TDR”) for the three months ended March 31, 2011.  In addition the Company had no loans that had been modified as TDR’s in the previous twelve months and that subsequently defaulted during the three months ended March 31, 2011 by not meeting the modified terms and conditions.
 
A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include loans modified in troubled debt restructuring where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
 
 
16

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 
5)
LOANS, continued
 
The following chart shows a breakdown of impaired loans at March 31, 2011 and December 31, 2010, by the unpaid principal balance, which is the contractual obligation of the borrower to the Company and the recorded balance of the loans as reflected in the financial statements, net of any charge offs to the allowance for loan losses:
 
     
March 31, 2011
   
December 31, 2010
 
     
Unpaid
         
Allowance for
   
Unpaid
         
Allowance for
 
     
Principal
   
Recorded
   
Loan Losses
   
Principal
   
Recorded
   
Loan Losses
 
 
(in thousands)
 
Balance
   
Investment
   
Allocated
   
Balance
   
Investment
   
Allocated
 
 
With no related allowance recorded:
                                   
 
  Commercial
  $ 2,014     $ 2,014     $ -     $ 2,014     $ 2,014     $ -  
 
  Commercial real estate
                                               
 
    Land, development and construction
    80,678       55,541       -       71,871       49,277       -  
 
    Other
    31,157       31,157       -       28,522       28,522       -  
 
    Churches
    1,016       1,016       -       1,018       1,018       -  
 
  Residential real estate
    13,032       12,937       -       9,926       9,824       -  
 
With an allowance recorded:
                                               
 
  Commercial
    -       -       -       -       -       -  
 
  Commercial real estate
                                               
 
    Land, development and construction
    24,681       23,052       3,273       34,179       32,577       5,696  
 
    Other
    1,875       1,875       808       150       150       58  
 
    Churches
    -       -       -       -       -       -  
 
  Residential real estate
    861       861       16       923       923       14  
 
        Total
  $ 155,314     $ 128,453     $ 4,097     $ 148,603     $ 124,305     $ 5,768  
 
The following is a summary of information showing the average investment in impaired loans by segment and the respective income recognized during the three-month periods for financial statement purposes.
 
     
March 31, 2011
   
March 31, 2010
 
     
Average
   
Interest
   
Average
   
Interest
 
     
Investment in
   
Income
   
Investment in
   
Income
 
 
(in thousands)
 
Impaired Loans
   
Recognized
   
Impaired Loans
   
Recognized
 
 
With no related allowance recorded:
                       
 
  Commercial
  $ 2,014     $ 1     $ 769     $ -  
 
  Commercial real estate
                               
 
    Land, development and construction
    52,773       34       68,582       230  
 
    Other
    29,839       62       21,277       36  
 
    Churches
    1,017       -       1,028       -  
 
  Residential real estate
    11,381       26       6,406       8  
 
With an allowance recorded:
                               
 
  Commercial
    -       -       -       -  
 
  Commercial real estate
                               
 
    Land, development and construction
    27,450       -       16,689       198  
 
    Other
    1,013       4       2,188       -  
 
    Churches
    -       -       -       -  
 
  Residential real estate
    892       1       191       4  
 
        Total
  $ 126,379     $ 128     $ 117,130     $ 476  
 
 
17

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
5)
LOANS, continued
 
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.  The following chart shows those loans at March 31, 2011 and December 31, 2010.
 
     
March 31, 2011
   
December 31, 2010
 
           
Past Due
         
Past Due
 
           
Loans over
         
Loans over
 
           
90 days still
         
90 days still
 
 
(in thousands)
 
Nonaccrual
   
Accruing
   
Nonaccrual
 
Accruing
 
                           
 
Commercial
  $ 2,280     $ 29     $ 2,198     $ 113  
 
Commercial real estate:
                               
 
  Land, development and construction
    57,157       7,793       60,404       87  
 
  Other
    21,792       1,409       20,081       565  
 
  Churches
    750       -       754       -  
 
Residential real estate
    4,047       448       3,904       258  
 
Consumer
    52       2       96       22  
      $ 86,078     $ 9,681     $ 87,437     $ 1,045  

At March 31, 2011, there were three lending relationships comprising $8.7 million of the total commercial real estate loans past due over 90 days and still accruing.  One relationship, with loans representing $6.2 million of the total, is in process of renewal and the customer has continued making monthly payments during the renewal period.  Another relationship, with loans totaling $1.3 million, has been renewed by the Bank since March 31, 2011 and is now current.  The Bank is currently in the process of renewing the loans in the third relationship of approximately $1.2 million.

The following shows the amount of loans, by segment past due at March 31, 2011 and December 31, 2010.
 
     
March 31, 2011
 
       30-59      60-89    
Greater than
                   
     
Days
   
Days
   
90 Days
   
Total
   
Loans Not
       
 
(in thousands)
 
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Total
 
                                           
 
Commercial
  $ 86     $ 35     $ 2,309     $ 2,430     $ 1,468     $ 3,898  
 
Commercial Real Estate:
                                               
 
  Land, development and construction
    2,101       141       64,060       66,302       59,412       125,714  
 
  Other
    4,497       4,669       22,363       31,529       74,150       105,679  
 
  Churches
    4,184       -       271       4,455       70,633       75,088  
 
Residential real estate
    1,936       782       4,144       6,862       42,386       49,248  
 
Consumer
    944       238       53       1,235       9,093       10,328  
 
    Total
  $ 13,748     $ 5,865     $ 93,200     $ 112,813     $ 257,142     $ 369,955  
 
 
18

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
5)
LOANS, continued
 
     
December 31, 2010
 
       30-59      60-89    
Greater than
                   
     
Days
   
Days
   
90 Days
   
Total
   
Loans Not
       
 
(in thousands)
 
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Total
 
                                           
 
Commercial
  $ 67     $ 14     $ 2,311     $ 2,392     $ 1,770     $ 4,162  
 
Commercial Real Estate:
                                               
 
  Land, development and construction
    19,828       2,548       59,005       81,381       49,158       130,539  
 
  Other
    3,975       3,130       19,792       26,897       79,242       106,139  
 
  Churches
    772       -       273       1,045       78,661       79,706  
 
Residential real estate
    1,329       268       4,000       5,597       43,144       48,741  
 
Consumer
    33       38       118       189       10,766       10,955  
 
    Total
  $ 26,004     $ 5,998     $ 85,499     $ 117,501     $ 262,741     $ 380,242  
 
Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis includes loans with an outstanding balance greater than $500,000, and non-homogeneous loans, such as commercial and commercial real estate loans.  This analysis is performed on at least an annual basis.  The Company uses the following definitions for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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.

 
 
19

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
 
5)
LOANS, continued
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  As of March 31, 2011 and December 31, 2010 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
     
March 31, 2011
 
           
Special
                   
 
(in thousands)
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
                                 
 
Commercial
  $ 1,526     $ 3     $ 2,369     $ -     $ 3,898  
 
Commercial real estate:
                                       
 
  Land, development and construction
    22,375       23,856       79,483       -       125,714  
 
  Other
    59,538       11,716       34,425       -       105,679  
 
  Churches
    69,440       4,117       1,531       -       75,088  
 
Residential real estate
    28,801       5,346       15,101       -       49,248  
 
Consumer
    9,859       57       412       -       10,328  
      $ 191,539     $ 45,095     $ 133,321     $ -     $ 369,955  
 
     
December 31, 2010