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
I - FINANCIAL INFORMATION
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.
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.
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.
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.
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.
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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | 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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 | |
| | | | | | Special | | | | | | | | | | |
| (in thousands) | | Pass | | | Mention | | | Substandard | | | Doubtful | | | Total | |
| | | | | | | | | | | | | | | | |
| Commercial | | $ | 1,736 | | | $ | 145 | | | $ | 2,281 | | | $ | - | | | $ | 4,162 | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | |
| Land, development and construction | | | 29,780 | | | | 18,341 | | | | 82,418 | | | | - | | | | 130,539 | |
| Other | | | 60,999 | | | | 15,067 | | | | 30,073 | | | | - | | | | 106,139 | |
| Churches | | | 74,134 | | | | 4,034 | | | | 1,538 | | | | - | | | | 79,706 | |
| Residential real estate | | | 31,849 | | | | 5,432 | | | | 11,460 | | | | - | | | | 48,741 | |
| Consumer | | | 10,721 | | | | 16 | | | | 218 | | | | - | | | | 10,955 | |
| | | $ | 209,219 | | | $ | 43,035 | | | $ | 127,988 | | | $ | - | | | $ | 380,242 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A detail of the Company’s nonperforming assets, by segment, is shown below. Nonperforming loans includes nonaccrual loans and loans past due 90 days or more still accruing interest.
| | | March 31, 2011 | |
| (in thousands) | | Nonperforming Loans | | | Foreclosed Properties | | | Total | |
| | | | | | | | | | |
| Commercial | | | 2,309 | | | | - | | | | 2,309 | |
| Commercial real estate | | | | | | | | | | | | |
| Land, development and construction | | | 64,950 | | | | 59,240 | | | | 124,190 | |
| Other | | | 23,201 | | | | 7,954 | | | | 31,155 | |
| Churches | | | 750 | | | | - | | | | 750 | |
| Residential real estate | | | 4,495 | | | | 10,916 | | | | 15,411 | |
| Consumer | | | 54 | | | | - | | | | 54 | |
| Total | | $ | 95,759 | | | $ | 78,110 | | | $ | 173,869 | |
| | | December 31, 2010 | |
| (in thousands) | | Nonperforming Loans | | | Foreclosed Properties | | | Total | |
| | | | | | | | | | |
| Commercial | | | 2,311 | | | | - | | | | 2,311 | |
| Commercial real estate | | | | | | | | | | | | |
| Land, development and construction | | | 60,491 | | | | 59,512 | | | | 120,003 | |
| Other | | | 20,646 | | | | 8,640 | | | | 29,286 | |
| Churches | | | 754 | | | | - | | | | 754 | |
| Residential real estate | | | 4,162 | | | | 11,299 | | | | 15,461 | |
| Consumer | | | 118 | | | | - | | | | 118 | |
| Total | | $ | 88,482 | | | $ | 79,451 | | | $ | 167,933 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6) | NONPERFORMING ASSETS, continued |
A summary of activity in foreclosed properties for the first three months of 2011 compared to the same period in 2010 is as follows:
| | | Three Months Ended March 31, | |
| (in thousands) | | 2011 | | | 2010 | |
| | | | | | | |
| Balance, beginning of year | | $ | 79,451 | | | $ | 49,732 | |
| Loans transferred to foreclosed properties | | | - | | | | 13,047 | |
| Capitalized costs to properties | | | 41 | | | | 27 | |
| Cash sales proceeds | | | (89 | ) | | | (1,418 | ) |
| Financed sales | | | (939 | ) | | | - | |
| Loss on sale of properties | | | (9 | ) | | | (111 | ) |
| Impairment losses | | | (345 | ) | | | (153 | ) |
| Balance, end of period | | $ | 78,110 | | | $ | 61,124 | |
Expenses (income) applicable to nonperforming assets (foreclosed properties and nonperforming loans) include the following:
| | | Three Months Ended March 31, | |
| (in thousands) | | 2011 | | | 2010 | |
| | | | | | | |
| Net loss on sales of real estate | | $ | 9 | | | $ | 111 | |
| Impairment losses on foreclosed assets | | | 345 | | | | 153 | |
| Operating expenses on foreclosed assets | | | 528 | | | | 239 | |
| Property taxes on nonperforming loans | | | 300 | | | | - | |
| Less: Rental income on foreclosed assets | | | (151 | ) | | | (75 | ) |
| | | $ | 1,031 | | | $ | 428 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7) | COMMITMENTS AND CONTINGENCIES |
Loan 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. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.
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 is as follows:
| | | March 31, | | | December 31, | |
| (in thousands) | | 2011 | | | 2010 | |
| | | | | | | |
| Standby letters of credit | | $ | 1,860 | | | $ | 2,056 | |
| | | | | | | | | |
| Commitments to extend credit | | | 13,904 | | | | 16,388 | |
| | | | | | | | | |
| | | $ | 15,764 | | | $ | 18,444 | |
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 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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7) | COMMITMENTS AND CONTINGENCIES, continued |
Loan Commitments, continued
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 loans to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
Contingencies
In the normal course of business, the Company is involved in various legal proceedings and actions to protect its interests in collateral supporting its loans. In the opinion of management, any liability or loss resulting from such proceedings or outcomes of such actions would not have a material adverse effect on the Company's financial statements.
8) | CONCENTRATIONS OF CREDIT RISK |
The Company originates primarily commercial, commercial real estate, residential real estate, and consumer loans to customers in Henry County and surrounding counties. The ability of the majority of the Company's customers to honor their contractual loan obligations is dependent on the economy in these areas.
Ninety-six percent of the Company's loan portfolio is concentrated in loans secured by real estate, of which a substantial portion is secured by real estate in the Company's primary market area. Thirty-five percent of the Company’s loan portfolio is specifically concentrated in real estate construction loans. Accordingly, the ultimate collectability of the loan portfolio and recovery of other real estate owned are susceptible to changes in market conditions in the Company's primary market area. The concentrations of credit by type of loan are set forth in Note 5.
The Bank, as a matter of state law, does not generally extend new credit to any single borrower or group of related borrowers, where the aggregate indebtedness would exceed 25% of statutory capital, or approximately $3,550,000.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At March 31, 2011, no dividends could be declared without prior regulatory approval.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined.
As a result of examination findings in mid 2009 by the Georgia Department of Banking and Finance, (the “DBF”) and the Federal Deposit Insurance Corporation (the “FDIC”), (collectively, the “Supervisory Authorities”), the Bank’s Directors, on May 14, 2010, entered into a Stipulation and Consent Agreement with the Supervisory Authorities agreeing to the issuance of a Consent Order (the “Order”). Specifically, the Order requires: increased involvement by the Bank’s Board of Directors; an assessment of current and future management and staffing needs; reductions in adversely classified assets; improvement in the overall quality and management of the loan portfolio; adequate allowance for loan losses; a Tier I leverage capital ratio of not less than 8% and a Total Risk Based capital ratio of not less than 10%; establishment of a plan to maintain adequate liquidity including a prohibition on accepting brokered deposits and a limitation on interest rates paid on all deposits; prior Supervisory Authority approval to pay cash dividends or Board of Director compensation; and adoption of an annual strategic plan and budget. The Order also establishes a framework and timeframes for the Bank reporting on its compliance with the provisions of the Order. Most of the provisions of the Order were already being addressed by management. However, there can be no assurance that the Bank will be successful in meeting all of the requirements of the Order.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9) | REGULATORY MATTERS, continued |
If the Bank fails to adequately address, or make substantial progress towards resolution of the regulatory concerns in the Order, the Supervisory Authorities may take further action including, but not limited to, additional requirements for maintaining sufficient capital under the Order. An ongoing failure to adequately address or make substantial progress towards addressing the concerns of the Supervisory Authorities could ultimately result in the eventual appointment of a receiver or conservator of the Bank’s assets.
The Supervisory Authorities examined the Bank during June and July 2010, and conducted an onsite visitation during February 2011. The findings of the Supervisory Authorities are fully reflected in the accompanying financial statements.
To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. At March 31, 2011 under the prompt corrective action framework, the Bank’s Tier 1 Risk Based Capital Ratio was considered undercapitalized and the Bank’s Tier 1 Leverage Ratio and the Bank’s Total Risk Based Capital Ratio were considered significantly undercapitalized. Therefore as of March 31, 2011, the Bank is considered, under the prompt corrective action framework, significantly undercapitalized as the lowest ratio determines the regulatory category. Prompt corrective action provisions are not applicable to bank holding companies.
| | | | | | | | | Well Capitalized | |
| | | | | | | | | Regulatory | |
| | | Consolidated | | | Bank | | | Requirement | |
| | | | | | | | | | |
| Leverage Capital Ratios | | | 2.49 | % | | | 2.47 | % | | | 5.00 | % |
| | | | | | | | | | | | | |
| Risk Based Capital Ratios: | | | | | | | | | | | | |
| Tier 1 | | | 2.97 | % | | | 2.94 | % | | | 6.00 | % |
| Total | | | 4.21 | % | | | 4.18 | % | | | 10.00 | % |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES |
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), 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 market 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 recent 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 distressed 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 technique 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 Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
Level 3 Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Interest-Bearing Deposits in Banks: The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.
Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.
Securities: Where quoted prices are available in an active market, the securities are classified within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.
If quoted market prices are not available, fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include obligations of Government Sponsored Entities (“GSE”), corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, those securities are classified in Level 3.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securities securitization transactions, adjusted for differences in loan characteristics. Fair value for other loans (for example, commercial real estate and commercial loans) are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Deposit Liabilities: The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.
Other Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.
Accrued Interest: The carrying amounts of accrued interest approximate fair value.
Off-balance Sheet Credit-Related Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
Assets and Liabilities Measured at Fair Value on a Recurring Basis: Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | Fair Value Measurements at March 31, 2011 Using | |
| (in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Carrying Value | |
| | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | |
| Securities available for sale | | $ | 6,597 | | | $ | 68,752 | | | $ | - | | | $ | 75,349 | |
| Total assets at fair value | | $ | 6,597 | | | $ | 68,752 | | | $ | - | | | $ | 75,349 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Fair Value Measurements at December 31, 2010 Using | |
| (in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Carrying Value | |
| | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Securities available for sale | | $ | 6,621 | | | $ | 60,594 | | | $ | - | | | $ | 67,215 | |
| Total assets at fair value | | $ | 6,621 | | | $ | 60,594 | | | $ | - | | | $ | 67,215 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
Assets Measured at Fair Value on a Nonrecurring Basis: Under certain circumstances adjustments are made to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the nonrecurring fair value changes made to financial instruments carried on the consolidated balance sheet by caption.
| | | For the three months ended March 31, 2011 | |
| | | Fair Value Changes Based On: | |
| (in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Losses | |
| | | | | | | | | | | | | |
| Impaired loans | | $ | - | | | $ | (471 | ) | | $ | 1,378 | | | $ | 907 | |
| Foreclosed assets | | | - | | | | - | | | | 345 | | | | 345 | |
| Total | | $ | - | | | $ | (471 | ) | | $ | 1,723 | | | $ | 1,252 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | |
| | | | |
| | | For the three months ended March 31, 2010 | |
| | | Fair Value Changes Based On: | |
| (in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Losses | |
| | | | | | | | | | | | | | | | | |
| Impaired loans | | $ | - | | | $ | 125 | | | $ | 155 | | | $ | 280 | |
| Foreclosed assets | | | - | | | | 9 | | | | 144 | | | | 153 | |
| Total | | $ | - | | | $ | 134 | | | $ | 299 | | | $ | 433 | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
In accordance with the provisions of the loan impairment guidance (FASB ASC 310-10-35), during the three months ended March 31, 2011, individual loans with Level 2 carrying amounts of $25,680,000 were written up to their fair value of $26,151,000 resulting in a recovery of previous charges to earnings for the three months ended March 31, 2011 of $471,000. Individual loans and foreclosed properties with Level 3 carrying amounts of $59,175,000 and $74,015,000, respectively, were written down to their fair values of $57,797,000 and $73,670,000, resulting in impairment charges to earnings in 2011 of $1,378,000 and $345,000, respectively. During the three months ended March 31, 2010 individual loans and foreclosed properties with Level 2 carrying amounts of $44,055,000 and $18,214,000, respectively, had been written down to their fair values of $43,930,000 and $18,205,000, resulting in impairment charges to earnings for the three months ended March 31, 2010 of $125,000 and $9,000, respectively. Individual loans and foreclosed properties with Level 3 carrying amounts of $38,286,000 and $46,408,000, respectively, had been written down to their fair values of $38,131,000 and $46,264,000, resulting in impairment charges to earnings for the three months ended March 31, 2010 of $155,000 and $144,000, respectively. Fair values for impaired loans are estimated using the present value of expected cash flows discounted at the loans effective interest rate or the appraised value of the underlying collateral discounted as necessary due to management’s estimates of changes in economic conditions.
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value, less estimated disposal costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed assets 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 appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
The carrying amount and estimated fair value of the Company's financial instruments were as follows:
| | | March 31, 2011 | | | December 31, 2010 | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | |
| (in thousands) | | Amount | | | Value | | | Amount | | | Value | |
| | | | | | | | | | | | | |
| Financial assets: | | | | | | | | | | | | |
| Cash, interest-bearing deposits in banks, | | | | | | | | | | | | |
| and excess Federal Reserve balances | | $ | 44,475 | | | $ | 44,475 | | | $ | 32,422 | | | $ | 32,422 | |
| Securities available for sale | | | 75,349 | | | | 75,349 | | | | 67,215 | | | | 67,215 | |
| Securities held to maturity | | | 375 | | | | 378 | | | | 375 | | | | 378 | |
| Restricted equity securities | | | 1,194 | | | | 1,194 | | | | 1,194 | | | | 1,194 | |
| Loans, net | | | 361,721 | | | | 361,217 | | | | 369,418 | | | | 369,167 | |
| Accrued interest receivable | | | 1,652 | | | | 1,652 | | | | 1,612 | | | | 1,612 | |
| | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | |
| Deposits | | $ | 556,691 | | | $ | 562,320 | | | $ | 544,663 | | | $ | 549,935 | |
| Other borrowings | | | 152 | | | | 152 | | | | 755 | | | | 755 | |
| Accrued interest payable | | | 1,251 | | | | 1,251 | | | | 1,522 | | | | 1,522 | |
On May 13, 2011, the Bank entered into an agreement to sell the land and facilities of its Locust Grove Branch to a Director of the Company and the Bank for $1.133 million resulting in a gain of approximately $715,000. The Bank received two unsolicited offers to purchase the land and facilities of the Branch and accepted the offer that provided the greatest net sales proceeds. As a condition of the sale, the Bank retains the right to continue banking operations in the facility, rent free, for a period of up to eighteen months.
Also on May 13, 2011, and subject to Regulatory approval, the Company and Bank entered into agreements with two of its officers whereby the officers agreed to freeze the total liability under their deferred compensation agreements in the amount of approximately $315,000, which had been recorded as a liability at December 31, 2010. The officers further agreed to receive shares of Common Stock in the Company in lieu of future cash retirement payments. To satisfy its obligation under the amended agreement, the Company has reserved for such use, 524,765 shares of common stock. The effect of the agreement is a reduction in other liabilities of approximately $315,000 and an increase in stockholders’ equity of a like amount.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following is management’s discussion and analysis of certain significant factors which have affected the financial position and operating results of Henry County Bancshares, Inc. (the “Company”) and its subsidiary, The First State Bank (the “Bank”), during the periods included in the accompanying consolidated financial statements.
Cautionary Notice Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about the Company and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results of the Company could be quite different from those expressed or implied by the forward-looking statements. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “could”, “may”, “will”, “should”, “plan”, “believes”, “anticipates”, “estimates”, “pro forma”, “seeks”, “intends”, “predicts”, “expects”, “projections”, “potential”, “continue”, or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of the Company and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010, which include among others the following factors:
| ● | the notes to our financial statements disclose a going concern issue for the Company; |
| ● | we have received a Prompt Corrective Action Notification; |
| ● | we have entered into a Consent Order with the Georgia Department of Banking and Finance (the “DBF”) and the Federal Deposit Insurance Corporation (the “FDIC”); |
| ● | the Company is currently attempting to raise additional capital through a Private Placement Memorandum. The proceeds from this offering may not be sufficient to meet the capital requirements of our regulators or otherwise support our operations; |
| ● | continued deterioration in the metro Atlanta real estate markets and more particularly Henry and surrounding counties; |
| ● | our allowance for loan losses may not be sufficient to cover actual loan losses that could be incurred; |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
| ● | increased carrying costs and the probability of additional impairment charges associated with our foreclosed properties |
| ● | extended holding periods that may be required before we can liquidate our foreclosed properties |
| ● | our ability to maintain liquidity or access other sources of funding; |
| ● | changes in the cost and availability of funding; |
| ● | changes in prevailing interest rates that may negatively affect our net income and the value of our assets; |
| ● | regulatory reform and changes in financial services laws and regulations; |
| ● | competition from financial institutions and other financial service providers; |
| ● | ability to retain key personnel, and; |
| ● | increasing FDIC Insurance premiums brought on by systemic industry deterioration in conjunction with a higher risk rating assigned to our Bank; |
This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business.
Overview
The following discussion is intended to provide insight into the financial condition and results of operations of the Company and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
Henry County Bancshares, Inc. (“we” or “us” or the “Company”), headquartered in Stockbridge, Georgia, is a Georgia business corporation which operates as a bank holding company. The Company was incorporated on June 22, 1982 for the purpose of reorganizing The First State Bank (the “Bank”) to operate within a holding company structure. The Bank is a wholly owned subsidiary of the Company.
The Company’s principal activities consist of owning and supervising the Bank, which engages in a full service commercial and consumer banking business, as well as a variety of deposit services provided to its customers. Until December 15, 2009, when it suspended operations, the Company also conducted mortgage-lending operations through the Bank’s wholly owned subsidiary, First Metro Mortgage Company (“First Metro”). First Metro provided the Bank’s customers with a wide range of mortgage banking services and products in the same primary market area as the Bank.
At March 31, 2011, we had total assets of $575 million, total loans of $370 million, total deposits of $557 million, and stockholders’ equity of $15 million.
For the first three months of 2011, we incurred a loss of $870,000 compared to earnings of $4.2 million for the same period in 2010. Our losses for the first quarter of 2011 resulted from increased impairment charges and carrying costs on foreclosed properties, property tax payments on nonperforming loans and increased regulatory costs.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
The Company’s nonperforming assets reflect the impact of slowed economic activity, depressed real estate values, reduced sales and a challenging banking environment. Total nonperforming assets at March 31, 2011 were $173.9 million compared to $167.9 million at December 31, 2010. The increase in nonperforming assets at March 31, 2011 compared to December 31, 2010 primarily reflects the increase in loans past due 90 days and still accruing interest of $8.6 million offset by nonperforming loans charged to the allowance for loan losses for the three months ended March 31, 2011 in the amount of $2.6 million. In addition, we sold approximately $1.0 million in foreclosed properties during the quarter ended March 31, 2011. Net loan charge-offs for the first three months amounted to $2.6 million compared to net recoveries of $3.3 million for the same period in 2010. The net recovery is the result of a positive fair value adjustment realized upon foreclosure of certain collateral. At March 31, 2011, our allowance for loan losses was $8.2 million or 2.23% of loans compared to $10.8 million or 2.85% at December 31, 2010.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2010 as filed in our annual report on Form 10-K. The more critical accounting and reporting policies include our accounting for the allowance for loan losses, fair value measurements, and income taxes. In particular, our accounting policies related to the allowance for loan losses, fair value measurements, and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of our accounting methodologies related to the allowance.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Results of Operations
For the first three months of 2011, we incurred a loss of $870,000 compared to earnings of $4.2 million for the same period in 2010. Our losses for the first three months resulted from increased impairment charges and carrying costs on foreclosed properties, property tax payments on nonperforming loans and increased regulatory costs. Net earnings for the first three months of 2010 included earnings from three one-time items totaling $4.8 million. These items were; recognition of $626,000 in interest previously reversed on nonaccrual loans and a line of credit used to pay interest; securities gains of $813,000; and a loan loss recovery of $3.3 million from a fair value adjustment on a loan being transferred to foreclosed properties. Not including these three adjustments, we would have incurred a loss of approximately $600,000 for the first three months of 2010.
Net cash provided by or (used in) operating activities (“operating cash flow”), which reflects net earnings or loss exclusive of noncash items, totaled ($167,000) for the first three months of 2011 compared to operating cash flow of $714,000 for the first three months of 2010. Included in operating cash flow for the first three months of 2010 is the recognition of $626,000 in interest that had previously been reversed on nonaccrual loans. Adjusted operating cash flow, not including the recognition of this interest, totaled $88,000 for the first three months of 2010. Operating cash flow is a significant liquidity measure that is critical to a bank’s operations and continued viability.
Our provision for loan losses amounted to $7,000 for the three months ended March 31, 2011, compared to a recovery of loan losses of $2.9 million for the same period in 2010. The provision for loans losses for the first three months of 2011 compared to the same period in 2010 declined, exclusive of the fair value adjustment of $3.3 million. The decline resulted from a decrease in loans outstanding and a decline in the average historical loss rate used in computing general reserves, plus a stabilization of real estate values, affecting the level of specific reserves required on impaired loans. For the three months ended March 31, 2011, we had impairment charges of $345,000 plus losses on the sale of foreclosed properties in the amount of $9,000 compared to $153,000 in impairment charges and $111,000 in losses for the same period in 2010. Expenses on nonperforming assets, net of rental income, increased from $164,000 for the three months ended March 31, 2010, to $677,000 for the same period in 2011. Property taxes on nonperforming loans were $300,000 for the first three months of 2011. The Bank did not incur any property tax expense on nonperforming loans during the first quarter of 2010. During the first three months of 2011 and 2010, FDIC and regulatory costs were $645,000 and $387,000, respectively. The increase in FDIC and regulatory costs were attributable to increased premium rates and an increased risk rating for the Bank.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Table 1 - Financial Highlights
Selected Financial Information
| | Three Months Ended: | |
| | March 31, | | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
(in thousands, except per share and other data) | | 2011 | | | 2010 | | | 2010 | | | 2010 | | | 2010 | |
SUMMARY OF OPERATIONS | | | | | | | |
Interest income | | $ | 4,445 | | | $ | 4,405 | | | $ | 4,670 | | | $ | 5,237 | | | $ | 5,682 | |
Interest expense | | | 2,153 | | | | 2,251 | | | | 2,365 | | | | 2,484 | | | | 2,860 | |
Net interest income | | | 2,292 | | | | 2,154 | | | | 2,305 | | | | 2,753 | | | | 2,822 | |
Provision for (recovery of) loan losses | | | 7 | | | | 690 | | | | 1,175 | | | | 2,180 | | | | (2,876 | ) |
Other income | | | 630 | | | | 677 | | | | 790 | | | | 952 | | | | 1,469 | |
Other expenses | | | 3,785 | | | | 4,908 | | | | 4,257 | | | | 7,070 | | | | 2,998 | |
Earnings (loss) before income taxes | | | (870 | ) | | | (2,767 | ) | | | (2,337 | ) | | | (5,545 | ) | | | 4,169 | |
Income tax expense (benefit) | | | - | | | | 229 | | | | - | | | | - | | | | - | |
Net earnings (losses) | | $ | (870 | ) | | $ | (2,996 | ) | | $ | (2,337 | ) | | $ | (5,545 | ) | | $ | 4,169 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | |
| | | | | | | | | | | | | | | | | | | | |
PERFORMANCE MEASURES | | | | | | | | | |
Per common share: | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share | | $ | (0.06 | ) | | $ | (0.21 | ) | | $ | (0.16 | ) | | $ | (0.39 | ) | | $ | 0.29 | |
Cash dividends per share | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Profitability ratios: | | | | | | | | | | | | | | | | | | | | |
Return on average equity | | | -23.58 | % | | | -64.00 | % | | | -43.28 | % | | | -82.56 | % | | | 63.53 | % |
Return on average assets | | | -0.61 | % | | | -2.12 | % | | | -1.62 | % | | | -3.77 | % | | | 2.75 | % |
Net interest margin | | | 1.96 | % | | | 1.79 | % | | | 1.78 | % | | | 2.20 | % | | | 2.21 | % |
Loan Quality Indicators | | | | | | | | | | | | | | | | | |
Net charge-offs (recoveries) | | | 2,597 | | | | 2,305 | | | | 166 | | | | 4,485 | | | | (3,287 | ) |
Net charge-offs (recoveries) to average loans (1) | | | 0.69 | % | | | 0.59 | % | | | 0.04 | % | | | 1.08 | % | | | -0.76 | % |
| | | | | | | | | | | | | | | | | | | | |
AVERAGE BALANCES | | | | | | | | | | | | | | | | |
Loans | | $ | 378,031 | | | $ | 390,775 | | | $ | 408,363 | | | $ | 416,877 | | | $ | 431,729 | |
Investment securities | | | 68,948 | | | | 61,194 | | | | 61,486 | | | | 51,751 | | | | 57,810 | |
Earning assets | | | 480,202 | | | | 477,521 | | | | 473,842 | | | | 507,255 | | | | 523,121 | |
Total assets | | | 574,269 | | | | 566,179 | | | | 575,419 | | | | 589,063 | | | | 606,236 | |
Deposits | | | 556,001 | | | | 543,740 | | | | 549,946 | | | | 558,710 | | | | 575,076 | |
Stockholders' equity | | | 14,757 | | | | 18,724 | | | | 21,598 | | | | 26,864 | | | | 26,247 | |
| | | | | | | | | | | | | | | | | | | | |
(1) Percentage not annualized | | | | | | | | | | | | | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Table 1 - Financial Highlights, continued
Selected Financial Information
| | At the Quarters Ended: | |
| | March 31, | | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| | 2011 | | | 2010 | | | 2010 | | | 2010 | | | 2010 | |
SELECTED BALANCE SHEET ITEMS | | | | |
Loans | | $ | 369,955 | | | $ | 380,242 | | | $ | 406,731 | | | $ | 408,207 | | | $ | 418,384 | |
Investment securities | | | 75,724 | | | | 67,590 | | | | 65,108 | | | | 56,845 | | | | 53,565 | |
Total assets | | | 574,870 | | | | 563,879 | | | | 563,557 | | | | 580,294 | | | | 600,269 | |
Deposits | | | 556,691 | | | | 544,663 | | | | 541,203 | | | | 554,283 | | | | 569,457 | |
Stockholders' equity | | | 14,761 | | | | 15,281 | | | | 19,231 | | | | 21,263 | | | | 26,619 | |
Common shares outstanding | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | | | | 14,245,690 | |
Book value | | | 1.04 | | | | 1.07 | | | | 1.35 | | | | 1.49 | | | | 1.87 | |
KEY BALANCE SHEET RATIOS | | | | | | | | | |
Liquidity ratios: | | | | | | | | | | | | | | | | | | | | |
Total loans to total deposits | | | 66.46 | % | | | 69.81 | % | | | 75.15 | % | | | 73.65 | % | | | 73.47 | % |
Average loans to average earning assets | | | 78.72 | % | | | 81.83 | % | | | 86.18 | % | | | 82.18 | % | | | 82.53 | % |
Noninterest-bearing deposits to total deposits | | | 12.34 | % | | | 11.02 | % | | | 12.64 | % | | | 12.93 | % | | | 10.51 | % |
Capital ratios: | | | | | | | | | | | | | | | | | | | | |
Leverage | | | 2.49 | % | | | 2.68 | % | | | 3.16 | % | | | 3.48 | % | | | 4.30 | % |
Risk-based capital | | | | | | | | | | | | | | | | | | | | |
Tier 1 | | | 2.97 | % | | | 3.14 | % | | | 3.73 | % | | | 4.19 | % | | | 5.15 | % |
Total | | | 4.21 | % | | | 4.39 | % | | | 4.99 | % | | | 5.45 | % | | | 6.42 | % |
ASSET QUALITY | | | | | | | | | | | | | | | | | | | | |
Non-performing loans | | $ | 95,759 | | | $ | 88,482 | | | $ | 106,678 | | | $ | 92,435 | | | $ | 83,580 | |
Foreclosed properties | | | 78,110 | | | | 79,451 | | | | 62,493 | | | | 65,336 | | | | 64,469 | |
Total non-performing assets (NPAs) | | | 173,869 | | | | 167,933 | | | | 169,171 | | | | 157,771 | | | | 148,049 | |
Allowance for loan losses | | | 8,234 | | | | 10,824 | | | | 12,439 | | | | 11,430 | | | | 13,735 | |
Allowance for loan losses to loans | | | 2.23 | % | | | 2.85 | % | | | 3.06 | % | | | 2.80 | % | | | 3.28 | % |
NPAs to loans and foreclosed properties | | | 38.80 | % | | | 36.53 | % | | | 36.05 | % | | | 33.32 | % | | | 30.66 | % |
NPAs to total assets | | | 30.24 | % | | | 29.78 | % | | | 30.02 | % | | | 27.19 | % | | | 24.66 | % |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Net Interest Income
Our results of operations are determined by our ability to manage interest income and expense effectively, to minimize loan and investment losses, to generate non-interest income, and to control operating expenses. Because interest rates are determined by market forces and economic conditions beyond our control, our ability to generate net interest income depends on our ability to obtain an adequate net interest spread between the rate we pay on interest-bearing liabilities and the rate we earn on interest-earning assets.
The net interest margin, declined during the first quarter of 2011 compared to the same period in 2010. When adjusted for the reversal and collection of interest on nonaccrual loans in both periods, as shown in the chart below, the net interest margin for the first quarter of 2011 compared to the same period in 2010 actually increased. The net interest margin for the three months ended March 31, 2011 was 1.96%, compared to 2.21% for the same period in 2010. The primary reason for the decline in net interest margin was that the yield on earning assets decreased more than the corresponding decrease in interest-bearing liabilities for the periods.
For the first three months of 2011, the cost of interest-bearing liabilities was 1.80%, compared to a cost of 2.29% for the same period in 2010, a decrease of 49 basis points. The decline in the cost of interest bearing liabilities is reflective of the overall decline in interest rates and the decline in funding needs of the Bank due to decreased loan demand. The decline in funding needs has allowed the Bank to not renew higher cost, non customer related deposits, which has helped reduce the overall cost of interest bearing liabilities and reduce the overall balance sheet.
The average yield on interest earning assets was 3.80% for the first quarter of 2011 and 4.45% for the same quarter in 2010. Average yields on loans were 4.87% for the first quarter of 2010 and 4.21% for the same quarter in 2011. The impact of non-recurring interest adjustments from loans placed on nonaccrual status and the collection of interest on nonaccrual loans impacted the yields in both periods, but with a much greater impact on the first quarter 2010 yields. During the first three months of 2010 some customers cured defaults that brought their loans current. These amounts were partially offset by interest reversed on loans placed on nonaccrual. In addition, an unrecorded 2009 advance on a line of credit for payment of interest was collected through foreclosure in 2010.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
The following chart shows the impact of these non recurring interest adjustments on the yield on earning assets and the net interest margin for the three months ended March 31, 2011 and 2010.
| | 2011 | | | 2010 | |
| | Average | | | | | | Average | | | Average | | | | | | Average | |
(in thousands) | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| | | | | | | | | | | | | | | | | | |
Amounts reflected in financial statements | | $ | 480,202 | | | $ | 4,445 | | | | 3.80 | % | | $ | 523,121 | | | $ | 5,682 | | | | 4.45 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect of nonaccrual interest (collected) reversed | | | | | | | (49 | ) | | | | | | | | | | | (476 | ) | | | | |
Effect of interest advance (collected) reversed | | | | | | | - | | | | | | | | | | | | (150 | ) | | | | |
Total adjustments | | | | | | | (49 | ) | | | | | | | | | | | (626 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts excluding the effect of nonaccrual interest income/reversals | | $ | 480,202 | | | $ | 4,396 | | | | 3.75 | % | | $ | 523,121 | | | $ | 5,056 | | | | 3.96 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net interest revenue | | | | | | $ | 2,243 | | | | | | | | | | | $ | 2,196 | | | | | |
Adjusted net interest margin | | | | | | | | | | | 1.92 | % | | | | | | | | | | | 1.72 | % |
Absent these non-recurring items, the yield on earning assets for the first three months of 2011 and 2010 would have been 3.75% and 3.96% respectively. The decrease in the adjusted yield on average interest earning assets is primarily the result of lower rates and the absence of significant new loan demand which results in cash flows from recurring payments and maturities of earning assets being reinvested at lower yields. Nonaccrual loans continued to have a significant impact on the earning asset yield in both periods. Average nonaccrual loans for the three month periods ended March 31, 2011 and 2010 were $87.4 million (15.2% of average assets) and $92.4 million (15.2% of average assets), respectively.
Net interest income totaled $2.3 million for the three month period ended March 31, 2011 compared to $2.8 million for the same period in 2010. Net interest income for the first quarter of 2011 and 2010, adjusted for non-recurring interest income items, totaled $2.2 million in both periods, representing an adjusted margin for the two periods of 1.92% and 1.72%, respectively.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Table 2 - Average Consolidated Balance Sheet and Net Interest Margin Analysis
For the three months ended March 31, 2011 and 2010
| | 2011 | | | 2010 | |
| | Average | | | | | | Average | | | Average | | | | | | Average | |
(in thousands) | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
Assets: | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans(1) | | $ | 378,031 | | | $ | 3,878 | | | | 4.21 | % | | $ | 431,729 | | | $ | 5,122 | | | | 4.87 | % |
Taxable securities(2)(3) | | | 66,597 | | | | 520 | | | | 3.20 | % | | | 52,946 | | | | 490 | | | | 3.80 | % |
Tax-exempt securities(2)(4) | | | 2,351 | | | | 30 | | | | 5.23 | % | | | 4,864 | | | | 48 | | | | 4.05 | % |
Overnight investments and other interest-earning assets | | | 33,223 | | | | 17 | | | | 0.21 | % | | | 33,582 | | | | 22 | | | | 0.27 | % |
Total interest-earning assets | | | 480,202 | | | | 4,445 | | | | 3.80 | % | | | 523,121 | | | | 5,682 | | | | 4.45 | % |
Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | (10,429 | ) | | | | | | | | | | | (17,372 | ) | | | | | | | | |
Cash and due from banks | | | 11,103 | | | | | | | | | | | | 11,427 | | | | | | | | | |
Other assets | | | 93,393 | | | | | | | | | | | | 89,060 | | | | | | | | | |
Total assets | | $ | 574,269 | | | | | | | | | | | $ | 606,236 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
NOW | | $ | 59,093 | | | $ | 32 | | | | 0.22 | % | | $ | 56,874 | | | $ | 69 | | | | 0.50 | % |
Money market | | | 37,901 | | | | 53 | | | | 0.57 | % | | | 36,517 | | | | 54 | | | | 0.61 | % |
Savings | | | 32,120 | | | | 35 | | | | 0.45 | % | | | 32,273 | | | | 39 | | | | 0.50 | % |
Time deposits less than $100,000 | | | 195,652 | | | | 1,140 | | | | 2.39 | % | | | 207,261 | | | | 1,410 | | | | 2.79 | % |
Time deposits greater than $100,000 | | | 127,013 | | | | 633 | | | | 2.04 | % | | | 124,157 | | | | 903 | | | | 2.98 | % |
Brokered deposits | | | 37,721 | | | | 260 | | | | 2.83 | % | | | 52,787 | | | | 374 | | | | 2.91 | % |
Total interest-bearing deposits | | | 489,500 | | | | 2,153 | | | | 1.80 | % | | | 509,869 | | | | 2,849 | | | | 2.29 | % |
Other borrowings | | | 319 | | | | - | | | | 0.00 | % | | | 1,468 | | | | 11 | | | | 3.07 | % |
Total interest-bearing liabilities | | | 489,819 | | | | 2,153 | | | | 1.80 | % | | | 511,337 | | | | 2,860 | | | | 2.29 | % |
Non-interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest-bearing deposits | | | 66,501 | | | | | | | | | | | | 65,207 | | | | | | | | | |
Other liabilities | | | 3,192 | | | | | | | | | | | | 3,445 | | | | | | | | | |
Total liabilities | | | 559,512 | | | | | | | | | | | | 579,989 | | | | | | | | | |
Stockholders' equity | | | 14,757 | | | | | | | | | | | | 26,247 | | | | | | | | | |
Total liabilities and stockholders' equity | | $ | 574,269 | | | | | | | | | | | $ | 606,236 | | | | | | | | | |
Net interest revenue | | | | | | $ | 2,292 | | | | | | | | | | | $ | 2,822 | | | | | |
Net interest-rate spread | | | | | | | | | | | 2.00 | % | | | | | | | | | | | 2.16 | % |
Net interest margin(5) | | | | | | | | | | | 1.96 | % | | | | | | | | | | | 2.21 | % |
(1) | Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued. |
(2) | Securities available for sale are shown at amortized cost. Average unrealized gains of $147,000 for the three months ended March 31, 2011 and $829,000 for the three months ended March 31, 2010 are included in other assets. |
(3) | Includes restricted equity securities |
(4) | Interest income on tax-exempt securities is not stated on a tax equivalent basis. |
(5) | Net interest margin is not stated on a tax-equivalent basis. |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Table 3 - Changes in Interest Income and Interest Expense
| | Three months ended March 31, 2011 | |
| | Compared to 2010 | |
| | Increase (decrease) | |
| | Due to Changes in | |
(in thousands) | | Volume | | | Rate | | | Total | |
Interest-earning assets: | | | | | | | | | |
Loans | | $ | (596 | ) | | $ | (648 | ) | | $ | (1,244 | ) |
Taxable securities | | | 114 | | | | (84 | ) | | | 30 | |
Tax-exempt securities | | | (29 | ) | | | 11 | | | | (18 | ) |
Overnight investments and other interest-earning assets | | | - | | | | (5 | ) | | | (5 | ) |
Total interest-earning assets | | | (511 | ) | | | (726 | ) | | | (1,237 | ) |
| | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | |
NOW | | | 2 | | | | (39 | ) | | | (37 | ) |
Money market | | | 2 | | | | (3 | ) | | | (1 | ) |
Savings | | | - | | | | (4 | ) | | | (4 | ) |
Time deposits less than $100,000 | | | (76 | ) | | | (194 | ) | | | (270 | ) |
Time deposits greater than $100,000 | | | 20 | | | | (290 | ) | | | (270 | ) |
Brokered deposits | | | (104 | ) | | | (10 | ) | | | (114 | ) |
Total interest-bearing deposits | | | (156 | ) | | | (540 | ) | | | (696 | ) |
Other borrowings | | | (5 | ) | | | (6 | ) | | | (11 | ) |
Total interest-bearing liabilities | | | (161 | ) | | | (546 | ) | | | (707 | ) |
| | | | | | | | | | | | |
Increase (decrease) in net interest revenue | | $ | (350 | ) | | $ | (180 | ) | | $ | (530 | ) |
Provision for Loan Losses
Our provision for loan losses amounted to $7,000 for the three months ended March 31, 2011, compared to a recovery of loan losses of $2.9 million for the same period in 2010. The allowance for loan losses as a percentage of total loans was 2.23% at March 31, 2011 compared to 2.85% at December 31, 2010. We maintain the allowance for loan losses at a level that we deem appropriate to cover all known and inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a continuing review of loan loss experience, current economic conditions which may affect the borrower’s ability to repay and the underlying collateral value.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Other Operating Income
Other operating income, not including securities gains, was $630,000 for the three months ended March 31, 2011 compared to $656,000 for the same period in 2010. For the first quarter of 2011, service charges on deposit accounts totaled $422,000 compared to $443,000 for the same period in 2010. The decrease in service charges for the first three months of 2011 compared to the same period in 2010 is primarily attributable to a decrease in insufficient fund items related to the implementation of new regulations concerning debit card transactions. Securities gains totaled $813,000 for the first three months of 2010. Mortgage banking income totaled $13,000 for the three months ended March 31, 2010, reflecting the amounts attributed to the sale of the mortgage loans in the pipeline when we suspended our mortgage operations in December 2009. There was no mortgage banking income during the first quarter of 2011.
Other Expenses
For the three month period ended March 31, 2011, other expenses, excluding expenses relating to net nonperforming assets and FDIC and regulatory expenses, declined $74,000 or 3.4% compared to the same period in 2010. Salaries and employee benefits declined by $13,000 and occupancy and equipment expenses declined by $3,000 for the quarter ended March 31, 2011 compared to the same period in 2010. For the quarter ended March 31, 2011, other operating expenses decreased by $58,000. The cost savings generated in controllable expenses were offset by increases in FDIC insurance premiums and net nonperforming assets expenses. FDIC and regulatory fees increased by $258,000 or 66.7% for the first quarter of 2011 compared to 2010.
Nonperforming assets expenses, net of rental income, totaled $1.0 million for the first quarter of 2011 compared to $428,000 for the first quarter of 2010. For the three months ended March 31, 2011, included in net nonperforming assets expenses are accruals for property taxes payable on foreclosed properties and nonperforming loans in the amounts of $375,000 and $300,000, respectively. Fair value adjustments to foreclosed properties were $345,000 and $153,000 for the first quarter of 2011 and 2010, respectively. Net losses on the sale of foreclosed properties approximated $9,000 for the three months ended March 31, 2011 compared to $111,000 for the same period in 2010.
Income Taxes
There was no income tax expense or (benefit) recognized for the periods ended March 31, 2011 and 2010.
Additional information regarding income taxes can be found in Note 10 to the consolidated financial statements filed in our 2010 Annual Report on Form 10-K.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Balance Sheet Review
Total assets at March 31, 2011 and December 31, 2010 were $574.9 million, and $563.9 million, respectively. Average total assets for the first three months of 2011 were $574.3 million, down $31.9 million or 5.3% from $606.2 million for the first three months of 2010.
Loans
The following table presents a composition of the Company’s loan portfolio.
| | 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 | |
At March 31, 2011, net loans were $361.7 million, a decline of $7.7 million or 2.1% from December 31, 2010. The decline in loans is the result of scheduled loan payments and stagnant growth due to the economic deterioration in the Henry County market.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Asset Quality and Risk Elements
We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures. Additional information on the credit administration function is included in Item 1 under the headings Lending Policy and Loan Review and Non-performing Assets in our 2010 Annual Report on Form 10-K.
We classify performing loans as substandard loans when there is a well-defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected. Substandard loans are classified as non-accrual substandard loans (or “non-performing loans”) when the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified as non-accrual, interest previously accrued but not collected is reversed against current interest revenue.
Reviews of substandard performing and non-performing loans, past due loans and larger credits, are conducted on a regular basis during the quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the chief credit officer and consider such factors as the financial strength of the borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
The following table presents a summary of the changes in the allowance for loan losses for the three months ended March 31, 2011 and 2010.
Table 6 - Allowance for Loan Losses
(in thousands) | | 2011 | | | 2010 | |
| | | | | | |
Allowance at beginning of the period | | $ | 10,824 | | | $ | 13,324 | |
| | | | | | | | |
Loans charged off: | | | | | | | | |
Real estate | | | (2,584 | ) | | | (124 | ) |
Commercial | | | - | | | | - | |
Consumer | | | (40 | ) | | | (7 | ) |
| | | (2,624 | ) | | | (131 | ) |
Recoveries: | | | | | | | | |
Real estate | | | 22 | | | | 3,405 | |
Commercial | | | 4 | | | | - | |
Consumer | | | 1 | | | | 13 | |
| | | 27 | | | | 3,418 | |
| | | | | | | | |
Net (charge-offs) recoveries | | | (2,597 | ) | | | 3,287 | |
| | | | | | | | |
Provision for (recovery of) loan losses | | | 7 | | | | (2,876 | ) |
| | | | | | | | |
Balance at end of the period | | $ | 8,234 | | | $ | 13,735 | |
| | | | | | | | |
Total loans: | | | | | | | | |
At period end | | $ | 369,955 | | | $ | 418,384 | |
Average | | | 378,031 | | | | 431,729 | |
| | | | | | | | |
Allowance as percentage of period end loans | | | 2.23 | % | | | 3.28 | % |
| | | | | | | | |
As a percentage of average loans: | | | | | | | | |
Net charge-offs(1) | | | 0.69 | % | | | -0.76 | % |
Provision for loan losses | | | 0.00 | % | | | -0.67 | % |
| | | | | | | | |
(1) Net charge off percentage not annualized | | | | | | | | |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance for loan losses at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. The decrease in both the provision and the allowance for loan losses compared to a year ago was due to our recognition and partial charge-off of loans deemed impaired in prior years and the stabilization of real estate values, and the overall decline in the loan portfolio.
Management believes that the allowance for loan losses at March 31, 2011 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section in our 2010 Annual Report on Form 10-K for additional information on the allowance for loan losses.
Nonperforming Assets
Our bank is located in what has historically been one of the fastest growing areas of the United States, south Metro Atlanta. A large number of our loans were to developers and contractors to purchase land, develop subdivisions and build houses to meet the growing population. The slowing economy has impacted many of our customers, causing stress in our portfolio, and increasing our nonperforming assets, which include nonperforming loans and foreclosed properties. Total nonperforming assets amounted to $173.9 million and $167.9 million at March 31, 2011 and December 31, 2010, respectively. The following table summarizes our nonperforming assets by category and type.
Table 7 - Nonperforming Assets
| | March 31, 2011 | | | December 31, 2010 | |
(in thousands) | | Nonperforming Loans | | | Foreclosed Properties | | | Total | | | Nonperforming Loans | | | Foreclosed Properties | | | Total | |
| | | | | | | | | | | | | | | | | | |
Commercial | | $ | 2,309 | | | $ | - | | | $ | 2,309 | | | $ | 2,311 | | | $ | - | | | $ | 2,311 | |
Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | |
Land, development and construction | | | 64,950 | | | | 59,240 | | | | 124,190 | | | | 60,491 | | | | 59,512 | | | | 120,003 | |
Other | | | 23,201 | | | | 7,954 | | | | 31,155 | | | | 20,646 | | | | 8,640 | | | | 29,286 | |
Churches | | | 750 | | | | - | | | | 750 | | | | 754 | | | | - | | | | 754 | |
Residential real estate | | | 4,495 | | | | 10,916 | | | | 15,411 | | | | 4,162 | | | | 11,299 | | | | 15,461 | |
Consumer | | | 54 | | | | - | | | | 54 | | | | 118 | | | | - | | | | 118 | |
Total | | $ | 95,759 | | | $ | 78,110 | | | $ | 173,868 | | | $ | 88,482 | | | $ | 79,451 | | | $ | 167,933 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NPLs as a percentage of total loans | | | | | | | | | | | 25.88 | % | | | | | | | | | | | 23.27 | % |
NPAs as a percentage of loans and foreclosed properties | | | | | | | | 38.80 | % | | | | | | | | | | | 36.53 | % |
NPAs as a percentage of total assets | | | | | | | | | | | 30.24 | % | | | | | | | | | | | 29.78 | % |
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Nonperforming loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $95.8 million or 25.9% of total loans at March 31, 2011, compared with $88.50 million or 23.3% at December 31, 2010.
| | March 31, 2011 | | | December 31, 2010 | |
| | | | | Past Due | | | | | | Past Due | |
| | | | | Loans over | | | | | | Loans over | |
| | | | | 90 days still | | | | | | 90 days still | |
| | 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, on those loans ninety days or more past due and still accruing interest, 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.
Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less estimated costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. For the three months ended March 31, 2010, the Bank transferred $13.0 million of loans into foreclosed property. There were no loans transferred to foreclosed properties during the three months ended March 31, 2011. During the first quarter of 2011 and 2010, proceeds from cash sales of foreclosed properties were $89,000 and $1.4 million, respectively. For the quarter ended March 31, 2011, the Bank financed sales of foreclosed properties of $939,000. There were no financed sales of foreclosed properties during the first quarter of 2010.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Investment Securities
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Securities available for sale at March 31, 2011 increased $8.1 million from December 31, 2010. The increase reflects the deployment of excess liquidity to maximize return in this protracted low interest rate environment.
Deposits
Total average deposits for the three month periods ended March 31, 2011 and 2010 were $556.0 million and $575.1 million, respectively. Average deposits during the first quarter of 2011 increased in all categories from the same period in 2010, except for brokered deposits and time deposits less than $100,000. With diminished loan demand, we have sufficient liquidity to fund our balance sheet without relying on funding other than customer deposits. Because we are not well-capitalized under prompt corrective action, we are unable to renew existing brokered certificates. We currently have $35.2 million of brokered deposits with approximately $20 million coming due in 2011 and the remainder in 2012. We have sufficient liquidity to pay off the brokered certificates as they mature.
Other Funding Sources
At March 31, 2011, the Bank had sufficient qualifying collateral pledged to the Federal Reserve Bank of Atlanta to secure discount window capacity of approximately $31.4 million.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Liquidity
The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A company may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities, and accessibility to market sources of funds. Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits to meet asset/liability objectives consistent with local market conditions.
Management continues to emphasize programs to generate local core deposits as our primary funding source. The stability of our core deposit base is an important factor in our liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility. Management regularly monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits as needed.
At March 31, 2011 we had loan commitments outstanding of $13.9 million and standby letters of credit of $1.9 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
As disclosed in the Company’s consolidated statement of cash flows, net cash used in operating activities was $167,000 for the three months ended March 31, 2011. Our net loss of $870,000 included non-cash losses relating to the fair market valuation of foreclosed properties in the amount of $345,000, depreciation of $115,000, and a decrease in interest payable of $271,000. Net cash used in investing activities of $3.3 million consisted primarily of cash provided from maturities of securities available for sale in the amount of $8.2 million and a decrease in loans of $8.6 million. Cash used in investing activities were purchases of securities available for sale of $16.0 million and increases in overnight balances and interest bearing deposits in banks of $4.1 million. The $11.4 million of net cash provided by financing activities consisted primarily of a net increase in deposits of $12.0 million, offset by a decrease in other borrowings of $603,000. In the opinion of management, the Company’s liquidity position at March 31, 2011 is sufficient to meet its expected cash flow requirements.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
Capital Resources
At March 31, 2011, we were considered significantly undercapitalized under regulatory guidelines. The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the actual capital ratios for Henry County Bancshares, Inc. and the Bank as of March 31, 2011 are as follows:
| | | | | | | | Well Capitalized | |
| | | | | | | | Regulatory | |
| | Consolidated | | | Bank | | | Requirement | |
| | | | | | | | | |
Leverage Capital Ratios | | | 2.49 | % | | | 2.47 | % | | | 5.00 | % |
| | | | | | | | | | | | |
Risk Based Capital Ratios: | | | | | | | | | | | | |
Tier 1 | | | 2.97 | % | | | 2.94 | % | | | 6.00 | % |
Total | | | 4.21 | % | | | 4.18 | % | | | 10.00 | % |
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.
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 and provide for positive operating cash flows throughout 2010. 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.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
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.
| Quantitative and Qualitative Disclosures About Market Risk |
We are exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities that are commonly pass through securities. Finally, we have no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk.” The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is our policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.
GAP management alone is not enough to properly manage interest rate sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a "Prime" rate and thus respond with less volatility to a market rate change.
We use a third party simulation model to monitor changes in net interest income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as economic value of equity over a twelve-month period is subjected up to a 400 basis point increase and decrease in rates. Our March 31, 2011 model reflects a 14.02% increase in economic value of equity for a 100 basis point increase in rates. The same model shows a 16.65% decrease in economic value of equity for a 100 basis point decrease in rates. Our asset/liability committee monitors changes on a quarterly basis, measures the changing values based on the model’s performance and determines an appropriate interest rate policy for management to follow in order to minimize the impact on earnings and economic value of equity in the projected rate environment.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
On May 13, 2011, the Bank entered into an agreement to sell the land and facilities of its Locust Grove Branch to a Director of the Company and the Bank for $1.133 million resulting in a gain of approximately $715,000. The Bank received two unsolicited offers to purchase the land and facilities of the Branch and accepted the offer that provided the greatest net sales proceeds. As a condition of the sale, the Bank retains the right to continue banking operations in the facility, rent free, for a period of up to eighteen months.
Also on May 13, 2011, and subject to regulatory approval, the Company and Bank entered into agreements with two of its officers, one of which is David H. Gill, CEO of the Company, whereby the officers agreed to freeze the total liability under their deferred compensation agreements in the amount of approximately $315,000, which had been recorded as a liability at December 31, 2010. The officers further agreed to receive shares of Common Stock in the Company in lieu of future cash retirement payments. To satisfy its obligation under the amended agreement, the Company has reserved for such use, 524,765 shares of common stock. The effect of the agreement is a reduction in other liabilities of approximately $315,000 and an increase in stockholders’ equity of a like amount.
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | HENRY COUNTY BANCSHARES, INC. |
| | (Registrant) |
| | |
DATE: | May 16, 2011 | By: | | |
| | | David H. Gill, President and CEO | |
| | | (Principal Executive Officer) | |
| | | | |
DATE: | | By: | /s/ Charles W. Blair, Jr. | |
| | | Charles W. Blair, Jr., EVP & CFO | |
| | | (Principal Financial and Accounting Officer) | |
| | | | |
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