Back to GetFilings.com



Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q



  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the quarterly period ended June 30, 2002

  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 small business issuer as specified in its charter)



  Georgia
(State or other jurisdiction of
incorporation or organization)
  58-1485511
(IRS Employer
Identification No.)
 

4806 N. Henry Blvd., Stockbridge, Georgia 30281
(Address of principal executive offices)

(770) 474-7293
(Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No o

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 15, 2002: 7,160,992; $2.50 par value


 


Table of Contents

HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX

        Page
           
PART I.   FINANCIAL INFORMATION  
           
    Item 1.   Financial Statements  
           
        Consolidated Balance Sheets- June 30, 2002 and December 31, 2001 3
           
        Consolidated Statements of Income and Comprehensive Income – Three and Six Months Ended June 30, 2002 and 2001 4
           
        Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 5
           
        Notes to Consolidated Financial Statements 6-8
           
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 9-15
           
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk 15
           
           
           
PART II.   OTHER INFORMATION  
           
    Item 4.   Submission of Matters to a Vote of Security Holders 16
           
    Item 6.   Exhibits and Reports on Form 8-K 16
           

 
   
SIGNATURES 17
   
   

 


Table of Contents

PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(Unaudited)

2002 2001


             
Assets              
Cash and due from banks   $ 25,024,729   $ 26,204,385  
Interest bearing deposits in banks     2,709,393     4,932,444  
Federal funds sold     29,000,000     43,800,000  
Securities available-for-sale, at fair value     76,072,227     100,508,622  
Securities held-to-maturity, at cost, (fair value 2002 $2,424,000; 2001
    $3,574,000)
    2,377,538     3,522,239  
Restricted equity securities, at cost     1,250,000     1,081,000  
Loans held for sale     870,478     1,575,156  
             
Loans     340,885,477     304,687,937  
Less allowance for loan losses     3,658,818     3,376,986  


     Loans, net     337,226,659     301,310,951  
             
Premises and equipment     8,403,840     7,441,919  
Other assets     4,837,109     5,808,370  


             
     Total assets   $ 487,771,973   $ 496,185,086  


             
Liabilities and Stockholders’ Equity              
Deposits              
   Noninterest-bearing   $ 74,666,955   $ 65,786,028  
   Interest-bearing     335,510,568     370,877,924  


     Total deposits     410,177,523     436,663,952  
Other borrowings     30,891,384     15,691,630  
Other liabilities     2,487,289     2,105,761  


     Total liabilities     443,556,196     454,461,343  


             
Commitments and contingencies              
             
Stockholders’ equity              
   Common stock, par value $2.50; 10,000,000 shares authorized;
       7,237,065.6 shares issued
    18,092,664     18,092,664  
   Capital surplus     739,560     739,560  
   Retained earnings     26,195,573     23,819,760  
   Accumulated other comprehensive income     581,396     152,733  
   Treasury stock     (1,393,416 )   (1,080,974 )


     Total stockholders’ equity     44,215,777     41,723,743  


             
     Total liabilities and stockholders’ equity   $ 487,771,973   $ 496,185,086  



See Notes to Consolidated Financial Statements.

3


Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,


2002 2001 2002 2001 




Interest income                          
   Loans   $ 5,788,360   $ 6,150,535   $ 11,449,812   $ 12,600,078  
   Taxable securities     923,718     1,703,433     2,005,198     3,612,155  
   Nontaxable securities     187,355     218,214     386,816     440,536  
   Deposits in banks     30,963     371     66,994     1,171  
   Federal funds sold     60,327     406,349     138,608     735,834  




     Total interest income     6,990,723     8,478,902     14,047,428     17,389,774  




                         
Interest expense                          
   Deposits     2,530,074     4,118,298     5,306,919     8,454,539  
   Other borrowings     335,928     312,698     595,949     614,955  




     Total interest expense     2,866,002     4,430,996     5,902,868     9,069,494  




                         
     Net interest income     4,124,721     4,047,906     8,144,560     8,320,280  
Provision for loan losses     152,000     150,000     302,000     300,000  




     Net interest income after provision for
         loan losses
    3,972,721     3,897,906     7,842,560     8,020,280  




                         
Other operating income                          
   Service charges on deposit accounts     542,156     567,591     1,018,415     1,119,664  
   Other service charges and fees     185,520     182,103     337,221     327,220  
   Mortgage banking income     300,613     528,735     757,450     884,841  
   Gain on sales of securities available-for-
       sale
    35,278         35,278      




     Total other income     1,063,567     1,278,429     2,148,364     2,331,725  




                         
Other expenses                          
   Salaries and employee benefits     1,356,041     1,465,574     2,743,469     2,836,088  
   Occupancy and equipment expenses     365,974     329,468     707,107     640,712  
   Other operating expenses     529,764     485,015     1,002,581     936,817  




     Total other expenses     2,251,779     2,280,057     4,453,157     4,413,617  




                         
     Income before income taxes     2,784,509     2,896,278     5,537,767     5,938,388  
                         
Income tax expense     1,004,281     1,063,260     2,016,197     2,118,574  




                         
     Net income     1,780,228     1,833,018     3,521,570     3,819,814  




Other comprehensive income (loss):                          
   Unrealized gains (losses) on securities
       available-for-sale, net of tax
    582,222     (141,745 )   428,663     643,465  




                         
Comprehensive income   $ 2,362,450   $ 1,691,273   $ 3,950,233   $ 4,463,279  




                         
Earnings per share   $ 0.25   $ 0.26   $ 0.49   $ 0.53  




Cash dividends per share   $ 0.08   $ 0.08   $ 0.16   $ 0.16  





See Notes to Consolidated Financial Statements.

4


Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

2002 2001


OPERATING ACTIVITIES              
   Net income   $ 3,521,570   $ 3,819,814  
   Adjustments to reconcile net income to net cash provided by operating
       activities:
             
     Gain on sales of securities available-for-sale     (35,278 )    
     Depreciation     292,134     286,267  
     Net decrease in loans held for sale     704,678     104,486  
     Provision for loan losses     302,000     300,000  
     Decrease in interest receivable     147,825     468,902  
     Increase (decrease) in interest payable     (75,939 )   107,076  
     Net other operating activities     1,060,077     46,356  


             
       Net cash provided by operating activities     5,917,067     5,132,901  


             
INVESTING ACTIVITIES              
   Purchases of securities available-for-sale     (12,271,890 )   (25,725,729 )
   Proceeds from sales of securities available-for-sale     10,636,562      
   Proceeds from maturities of securities available-for-sale     26,756,490     37,920,169  
   Proceeds from maturities of securities held-to-maturity     1,144,701     1,896,396  
   Purchase of restricted equity securities     (169,000 )    
   Net (increase) decrease in federal funds sold     14,800,000     (26,740,000 )
   Net (increase) decrease in interest-bearing deposits in banks     2,223,051     (37,405 )
   Net increase in loans     (36,217,708 )   (9,259,060 )
   Purchase of premises and equipment     (1,254,055 )   (125,140 )


             
       Net cash provided by (used in) investing activities     5,648,151     (22,070,769 )


             
FINANCING ACTIVITIES              
   Net increase (decrease) in deposits     (26,486,429 )   26,723,021  
   Net proceeds from other borrowings     15,199,754     2,642,976  
   Dividends paid     (1,145,757 )   (1,149,998 )
   Purchase of treasury stock     (312,442 )   (177,354 )


             
       Net cash provided by (used in) financing activities     (12,744,874 )   28,038,645  


             
Net increase (decrease) in cash and due from banks     (1,179,656 )   11,100,777  
             
Cash and due from banks, beginning of period     26,204,385     8,434,125  


             
Cash and due from banks, end of period   $ 25,024,729   $ 19,534,902  


             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION              
   Cash paid for:              
     Interest   $ 5,978,807   $ 6,523,869  
             
     Income taxes   $ 2,084,164   $ 2,284,028  

See Notes to Consolidated Financial Statements.

5


Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.      BASIS OF PRESENTATION

  The consolidated financial information for Henry County Bancshares, Inc. (the “Company”) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period.

  The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

NOTE 2.      SUPPLEMENTAL SEGMENT INFORMATION

  The Company has two reportable segments: commercial banking and mortgage loan origination. The commercial banking segment provides traditional banking services offered through the Bank. The mortgage loan origination segment provides mortgage loan origination services offered through First Metro.

  The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.

  The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were to third parties, that is, at current market prices.

  The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment has different types and levels of credit and interest rate risk.

INDUSTRY SEGMENTS

For the Six Months Ended June 30, 2002   Commercial
Banking
Mortgage All
Other
Eliminations Total






Interest income   $ 14,091,700   $ 2,575   $   $ (46,847 ) $ 14,047,428  
Interest expense     5,905,443     44,272         (46,847 )   5,902,868  
Net interest income (expense)     8,186,257     (41,697 )           8,144,560  
Intersegment net interest income
    (expense)
    41,697     (41,697 )            
Other revenue from external sources     1,390,914     757,450             2,148,364  
Intersegment other revenues     27,500     (27,500 )            
Depreciation     286,590     1,002     4,542         292,134  
Provision for loan losses     302,000                 302,000  
Segment profit     5,506,568     112,110     (80,911 )       5,537,767  
Segment assets     487,575,559     1,621,059     270,936     (1,695,581 )   487,771,973  
Expenditures for premises and
    equipment
    1,254,055                 1,254,055  

6


Table of Contents

NOTE 2.      SUPPLEMENTAL SEGMENT INFORMATION (Continued)

INDUSTRY SEGMENTS

For the Six Months Ended June 30, 2001   Commercial
Banking
Mortgage All
Other
Eliminations Total






Interest income   $ 17,517,313   $   $   $ (127,539 ) $ 17,389,774  
Interest expense     9,069,494     127,539         (127,539 )   9,069,494  
Net interest income (expense)     8,447,819     (127,539 )           8,320,280  
Intersegment net interest income
    (expense)
    127,539     (127,539 )            
Other revenue from external sources     1,446,884     884,841             2,331,725  
Intersegment other revenues     21,500     (27,500 )   6,000          
Depreciation     278,502     3,049     4,716         286,267  
Provision for loan losses     300,000                 300,000  
Segment profit     5,859,194     131,534     (52,340 )       5,938,388  
Segment assets     478,536,803     1,659,389     262,481     (1,713,463 )   478,745,210  
Expenditures for premises and
    equipment
    125,140                 125,140  

INDUSTRY SEGMENTS

For the Three Months Ended June 30, 2002   Commercial
Banking
Mortgage All
Other
Eliminations Total






Interest income   $ 7,003,583   $   $   $ (12,860 ) $ 6,990,723  
Interest expense     2,866,002     12,860         (12,860 )   2,866,002  
Net interest income (expense)     4,137,581     (12,860 )           4,124,721  
Intersegment net interest income
    (expense)
    12,860     (12,860 )            
Other revenue from external sources     762,954     300,613             1,063,567  
Intersegment other revenues     13,750     (13,750 )            
Depreciation     147,195     501     2,271         149,967  
Provision for loan losses     152,000                 152,000  
Segment profit     2,805,455     28,124     (49,070 )       2,784,509  
Expenditures for premises and
    equipment
    677,589                 677,589  

INDUSTRY SEGMENTS

For the Three Months Ended June 30, 2001   Commercial
Banking
Mortgage All
Other
Eliminations Total






Interest income   $ 8,555,385   $   $   $ (76,483 ) $ 8,478,902  
Interest expense     4,430,996     76,483         (76,483 )   4,430,996  
Net interest income (expense)     4,124,389     (76,483 )           4,047,906  
Intersegment net interest income
    (expense)
    76,483     (76,483 )            
Other revenue from external sources     749,694     528,735             1,278,429  
Intersegment other revenues     10,750     (13,750 )   3,000          
Depreciation     139,251     2,213     2,358         143,822  
Provision for loan losses     150,000                 150,000  
Segment profit     2,813,327     108,363     (25,412 )       2,896,278  
Expenditures for premises and
    equipment
    108,085                 108,085  
                               

 

7


Table of Contents

NOTE 3.      CURRENT ACCOUNTING DEVELOPMENTS

  There are no recent accounting pronouncements that have had, or are expected to have, a material effect on the Company’s financial statements.

8


Table of Contents

ITEM 2. 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 the Henry County Bancshares, Inc. and its subsidiaries, The First State Bank and First Metro Mortgage Co., during the periods included in the accompanying consolidated financial statements.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) are forward-looking statements for purposes of the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Henry County Bancshares, Inc. to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward looking statements include statements using the words such as “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” “intend,” or other similar words and expressions of the future. Our actual results may differ significantly from the results we discuss in these forward-looking statements.

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and other interest-sensitive assets and liabilities; interest rate risks; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer, and the Internet.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2001 as filed in our registration statement on Form 10.

Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Please see the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

9


Table of Contents

Liquidity and Capital Resources

Our liquidity and capital resources are monitored on a periodic basis by management, State and Federal regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy, our liquidity ratio of 22% at June 30, 2002 was considered satisfactory.

At June 30, 2002, our capital ratios were in excess of the regulatory minimum capital requirements to be classified as well-capitalized. The regulatory minimum capital requirements to be classified as well-capitalized and our actual capital ratios on a consolidated and bank-only basis are as follows:

Actual

Consolidated Bank Minimum
Regulatory
Requirement



                   
Leverage capital ratios     9.15 %   8.96 %   4.00 %
Risk-based capital ratios:                    
   Core capital     11.84     11.65     4.00  
   Total capital     12.83     12.65     8.00  

Off-Balance Sheet Risk

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

Our 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. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is as follows:

June 30,
2002

   
Commitments to extend credit   $ 83,972,000  
Letters of credit     2,852,000  

  $ 86,824,000  


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. 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 us upon extension of credit, is based on our credit evaluation of the customer.

10


Table of Contents

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those letters of credit 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 is required in instances which we deem necessary.

Financial Condition

Following is a summary of our balance sheets for the periods indicated:

June 30,
2002
December 31,
2001


(Dollars in Thousands)

Cash and due from banks   $ 25,025   $ 26,204  
Interest-bearing deposits in banks     2,709     4,932  
Federal funds sold     29,000     43,800  
Securities     79,700     105,112  
Loans, net     337,227     301,311  
Loans held for sale     870     1,575  
Premises and equipment     8,404     7,442  
Other assets     4,837     5,809  


  $ 487,772   $ 496,185  


             
Total deposits   $ 410,178   $ 436,664  
Other borrowings     30,891     15,691  
Other liabilities     2,487     2,106  
Stockholders’ equity     44,216     41,724  


  $ 487,772   $ 496,185  



Our assets decreased by 2% for the first six months of 2002. A $32 million decrease in public deposits was the primary reason total deposits decreased by $26.5 million. Proceeds from sales and maturities of securities, increases in other borrowings and non-public deposit growth, and a decrease in federal funds sold funded net loan growth of $35.9 million. Our loan to deposit ratio has increased to 83% at June 30, 2002 from 70% at December 31, 2001 due to loan growth and the decrease in total deposits. Our total equity has increased by $2.5 million year-to-date as net income of $3.5 million and increased unrealized gains on securities available-for-sale, net of tax, of $429,000 was offset by dividends paid of $1.1 million, and the purchase of treasury stock of $312,000.

11


Table of Contents

Results of Operations For The Three and Six Months Ended June 30, 2002 and 2001

Following is a summary of our operations for the periods indicated.

Three Months Ended
June 30,

2002 2001


(Dollars in Thousands)

Interest income   $ 6,991   $ 8,479  
Interest expense     2,866     4,431  


Net interest income     4,125     4,048  
Provision for loan losses     152     150  
Other income     1,063     1,278  
Other expense     2,252     2,280  


Pretax income     2,784     2,896  
Income taxes     1,004     1,063  


Net income   $ 1,780   $ 1,833  



Six Months Ended
June 30,

2002 2001


(Dollars in Thousands)

Interest income   $ 14,048   $ 17,390  
Interest expense     5,903     9,070  


Net interest income     8,145     8,320  
Provision for loan losses     302     300  
Other income     2,148     2,332  
Other expense     4,453     4,414  


Pretax income     5,538     5,938  
Income taxes     2,016     2,118  


Net income   $ 3,522   $ 3,820  



12


Table of Contents

Our net interest income increased by $77,000 in the second quarter of 2002 but decreased by $175,000 in the first six months of 2002 as compared to the same periods in 2001. Our net yield on average interest-earning assets decreased to 3.69% in the first six months of 2002 as compared to 3.81% in the first six months of 2001 and 3.79% for the entire year of 2001. The decrease in year-to-date net interest income and net yield is due primarily to the yields earned on loans that have decreased to 7.05% in the first six months of 2002 as compared to 9.02% in the first six months of 2001. The cost of funds has decreased as well, decreasing to 3.30% in the first six months of 2002 as compared to 5.06% in the first six months of 2001.

The provision for loan losses increased by $2,000 for the second quarter and first six months of 2002 as compared to the same periods in 2001. The amounts provided are due primarily to loan growth and our assessment of the inherent risk in the loan portfolio. The allowance for loan losses as a percentage of total loans was 1.07% at June 30, 2002 as compared to 1.11% at December 31, 2001. The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately 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.

Information with respect to nonaccrual, past due and restructured loans at June 30, 2002 and 2001 is as follows:

June 30,

2002 2001


(Dollars in Thousands)

Nonaccrual loans   $ 225   $ 775  
Loans contractually past due ninety days or more as to interest or
    principal payments and still accruing
    421     1,809  
Restructured loans     0     0  
Potential problem loans     2,647     519  
Interest income that would have been recorded on nonaccrual and
    restructured loans under original terms
    10     25  
Interest income that was recorded on nonaccrual and restructured loans     0     0  

Potential problem loans are defined as loans about which we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be restructured.

Our policy is to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful. This status is accorded interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection. Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable.

13


Table of Contents

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. These classified loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Information regarding certain loans and allowance for loan loss data through June 30, 2002 and 2001 is as follows:

Six Months Ended
June 30,

2002 2001


(Dollars in Thousands)

Average amount of loans outstanding   $ 324,978   $ 279,251  


             
Balance of allowance for loan losses at beginning of period   $ 3,377   $ 2,884  


             
Loans charged off              
   Real estate          
   Commercial          
   Consumer installment     (40 )   (22 )


    (40 )   (22 )


             
Loans recovered              
   Real estate          
   Commercial          
   Consumer installment     20     12  


    20     12  


             
Net (charge-offs)/ recoveries     (20 )   (10 )


             
Additions to allowance charged to operating expense during period     302     300  


             
Balance of allowance for loan losses at end of period   $ 3,659   $ 3,174  


             
Ratio of net loans charged off during the period to
    average loans outstanding
    .01 %   .01 %



The allowance for loan losses is maintained at a level that is deemed appropriate by us to adequately cover all known and inherent risks in the loan portfolio. Our evaluation considers significant factors relative to the credit risk and loss exposure in the loan portfolio, including past due and classified loans, historical experience, underlying collateral values, and current economic conditions that may affect the borrower’s ability to repay. The allowance for loan losses is evaluated by segmenting the loan portfolio into unclassified and classified loans. An allowance percentage is applied to the unclassified loans to establish a general allowance for loan losses. The allowance percentage determined is based upon our experience specifically and the historical experience of the banking industry generally. The classified loans, including impaired loans, are analyzed individually in order to establish a specific allowance for loan losses. A loan is considered

14


Table of Contents

impaired when it is probable that we will be unable to collect all principal and interest due in accordance with the contractual terms of the loan agreement.

Other income decreased by $215,000 and $184,000 in the second quarter and first six months of 2002, respectively, as compared to the same periods in 2001. The decreases are due to a reduction in mortgage banking income occurring during the second quarter of 2002 and decreased service charges on deposit accounts.

Other expenses have remained fairly stable as indicated by a decrease of $28,000 in the second quarter of 2002 and an increase of $39,000 fir the first six months of 2002 as compared to the same periods in 2001.

We have provided for income taxes at an effective tax rate of 36% for the first six months of 2002 and 2001.

We are not aware of any known trends, events or uncertainties, other than the effect of events as described above, that will have or are reasonably likely to have a material effect on our liquidity, capital resources or operations. We are also not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.

ITEM 3. 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 market value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The June model reflects an increase of 15% in net interest income and a 5% increase in market value equity for a 200 basis point increase in rates. The same model shows a 14% decrease in net interest income and a 14% decrease in market value equity for a 200 basis point decrease in rates. Our investment 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 market value equity in the projected rate environment.

15


Table of Contents

II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         (a)      The annual meeting of the stockholders of the Company was held on March 13, 2002.

         (b)      The following directors were elected at the meeting to serve for a one-year term.

  Hans M. Broder, Jr.
Paul J. Cates, Jr.
H.K. Elliott, Jr.
G.R. Foster, III
David H. Gill
Mary Lynn Lambert
Edwin C. Kelley, Jr.
Robert O. Linch
Ronald M. Turpin
James C. Waggoner

  The shares represented at the meeting (5,174,073 or 72.05%) voted unanimously for the election of the directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      Exhibits.

  99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
  99.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         (b)      Reports on Form 8-K.

                   None.

16


Table of Contents

SIGNATURES

         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: November 12, 2002   By:  /s/ DAVID H. GILL

      David H. Gill, President and C.E.O
(Principal Executive Officer)


   
DATE: November 12, 2002   By:  /s/ DEBBIE WALKER

      Debbie Walker, Senior Vice President
(Principal Financial and Accounting Officer)


17