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 September 30, 2007

¨ 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 or other jurisdiction of incorporation or organization)	(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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨     Accelerated filer  x    Non-accelerated filer  ¨

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 7, 2007: 14,301,218; $2.50 par value

HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX

		Page
PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Balance Sheets- September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Income and Comprehensive Income – Three and Nine Months Ended September 30, 2007 and 2006	4
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2007 and 2006	5
	Notes to Consolidated Financial Statements	6-8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
	Item 4. Controls and Procedures	17
PART II.	OTHER INFORMATION
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	18
	Item 6 - Exhibits and Reports on Form 8-K	18
	Signatures	19
	Certifications	20

2

PART I—FINANCIAL INFORMATION

FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2007 AND DECEMBER 31, 2006

(Unaudited)

	2007			2006
Assets
Cash and due from banks	$	15,418,824		$	18,584,790
Interest bearing deposits in banks		1,727,103			294,763
Federal funds sold		22,400,000			5,500,000
Securities available for sale, at fair value		116,437,659			84,379,359
Securities held to maturity, at cost, (fair value 2007 $5,159,000; 2006 $4,167,000)		5,221,182			4,328,339
Restricted equity securities, at cost		1,897,751			2,369,651
Loans held for sale		—			666,066
Loans		570,601,113			561,646,248
Less allowance for loan losses		6,433,195			5,229,838
Loans, net		564,167,918			556,416,410
Premises and equipment		10,495,973			9,936,123
Other assets		14,262,835			11,835,315
Total assets	$	752,029,245		$	694,310,816
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	66,028,428		$	77,493,610
Interest-bearing		588,006,246			517,379,804
Total deposits		654,034,674			594,873,414
Other borrowings		16,429,494			24,221,682
Other liabilities		5,052,450			4,017,123
Total liabilities		675,516,618			623,112,219
Stockholders’ equity
Common stock, par value $2.50; 30,000,000 shares authorized;
14,388,749.6 shares issued		35,971,874			35,971,874
Capital surplus		739,560			739,560
Retained earnings		41,030,499			35,942,063
Accumulated other comprehensive income (loss)		66,295			(159,299	)
Treasury stock, 67,282 shares		(1,295,601	)		(1,295,601	)
Total stockholders’ equity		76,512,627			71,198,597
Total liabilities and stockholders’ equity	$	752,029,245		$	694,310,816

See Notes to Consolidated Financial Statements.

3

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Interest income
Loans	$	11,101,371	$	11,570,748	$	34,514,179	$	32,504,971
Taxable securities		1,413,061		723,835		3,748,241		1,994,823
Nontaxable securities		95,190		94,348		272,074		232,282
Deposits in banks		34,895		3,941		41,791		10,341
Federal funds sold		195,342		202,435		766,264		397,574
Total interest income		12,839,859		12,595,307		39,342,549		35,139,991
Interest expense
Deposits		6,615,861		5,118,721		18,705,125		13,658,527
Other borrowings		176,481		313,641		792,245		807,354
Total interest expense		6,792,342		5,432,362		19,497,370		14,465,881
Net interest income		6,047,517		7,162,945		19,845,179		20,674,110
Provision for loan losses		1,257,754		110,520		1,434,254		506,860
Net interest income after provision for loan losses		4,789,763		7,052,425		18,410,925		20,167,250
Other operating income
Service charges on deposit accounts		327,942		365,484		1,003,703		1,133,170
Other service charges and fees		270,452		284,740		840,771		868,066
Mortgage banking income		163,635		139,673		491,125		538,540
Total other income		762,029		789,897		2,335,599		2,539,776
Other expenses
Salaries and employee benefits		1,887,351		1,671,982		5,419,357		4,871,299
Occupancy and equipment expenses		513,358		458,161		1,428,129		1,278,324
Other operating expenses		554,083		550,090		1,723,907		1,601,487
Total other expenses		2,954,792		2,680,233		8,571,393		7,751,110
Income before income taxes		2,597,000		5,162,089		12,175,131		14,955,916
Income tax expense		936,399		1,961,160		4,508,832		5,571,770
Net income		1,660,601		3,200,929		7,666,299		9,384,146
Other comprehensive income:
Unrealized gains on securities available for sale, net of tax		469,709		320,126		225,594		143,193
Comprehensive income	$	2,130,310	$	3,521,055	$	7,891,893	$	9,527,339
Earnings per share	$	0.12	$	0.22	$	0.54	$	0.66
Weighted average shares outstanding		14,321,468		14,303,368		14,321,468		14,303,368
Cash dividends per share	$	0.06	$	0.05	$	0.18	$	0.15

See Notes to Consolidated Financial Statements.

4

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Unaudited)

	2007			2006
OPERATING ACTIVITIES
Net income	$	7,666,299		$	9,384,146
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		501,668			451,387
Net decrease in loans held for sale		666,066			318,000
Provision for loan losses		1,434,254			506,860
Net (gains) losses on sale of other real estate		13,522			(4,708	)
Increase in interest receivable		(1,427,501	)		(3,037,645	)
Increase in interest payable		264,750			1,276,807
Net other operating activities		(169,963	)		1,399,454
Net cash provided by operating activities		8,949,095			10,294,301
INVESTING ACTIVITIES
Purchases of securities available for sale		(70,978,609	)		(39,031,497	)
Purchases of securities held to maturity		(1,001,140	)		(4,215,000	)
Proceeds from maturities of securities available for sale		39,262,119			30,880,451
Proceeds from maturities of securities held to maturity		108,297			181,020
(Purchases) retirement of restricted equity securities		471,900			(321,900	)
Net increase in federal funds sold		(16,900,000	)		(13,100,000	)
Net (increase) decrease in interest-bearing deposits in banks		(1,432,340	)		24,440
Net increase in loans		(10,007,207	)		(41,104,686	)
Proceeds from sale of other real estate		632,228			132,383
Purchase of premises and equipment		(1,061,518	)		(664,798	)
Net cash used in investing activities		(60,906,270	)		(67,219,587	)
FINANCING ACTIVITIES
Net increase in deposits		59,161,260			54,077,524
Net proceeds from (repayments of) other borrowings		(7,792,188	)		5,499,844
Dividends paid		(2,577,863	)		(2,145,505	)
Net cash provided by financing activities		48,791,209			57,431,863
Net increase (decrease) in cash and due from banks		(3,165,966	)		506,577
Cash and due from banks, beginning of period		18,584,790			15,950,626
Cash and due from banks, end of period	$	15,418,824		$	16,457,203
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	19,232,620		$	13,189,074
Income taxes	$	5,578,299		$	5,711,923
Noncash transactions:
Other real estate acquired in settlement of loans	$	895,290		$	364,361
Financed sales of other real estate owned	$	73,845		$	169,262

See Notes to Consolidated Financial Statements.

5

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 nine month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Standards

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard provides for guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Company is currently evaluating this Statement and has not yet determined the financial assets and liabilities, if any, for which the fair value option would be elected or the potential impact on the consolidated financial statements, if such election were made.

6

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 First State Bank. The mortgage loan origination segment provides mortgage loan origination services offered through First Metro.

The accounting policies of the segments are the same as those described in the footnotes to the December 31, 2006 consolidated financial statements as filed in our annual report on Form 10-K. 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 Nine Months Ended September 30, 2007	Commercial Banking		Mortgage			All Other			Eliminations			Total
Interest income	$	39,391,440	$	13,101		$	—		$	(61,992	)	$	39,342,549
Interest expense		19,510,471		48,891			—			(61,992	)		19,497,370
Net interest income (expense)		19,880,969		(35,790	)		—			—			19,845,179
Intersegment net interest income (expense)		61,992		(61,992	)		—			—			—
Other revenue from external sources		1,835,024		491,125			9,450			—			2,335,599
Intersegment other revenues		18,630		(18,630	)		—			—			—
Depreciation		496,535		450			4,683			—			501,668
Provision for loan losses		1,434,254		—			—			—			1,434,254
Segment profit (loss)		12,327,284		(108,731	)		(43,422	)		—			12,175,131
Segment assets		752,650,902		825,938			1,095,059			(2,542,654	)		752,029,245
Expenditures for premises and equipment		1,061,518		—			—			—			1,061,518

7

NOTE 2. SUPPLEMENTAL SEGMENT INFORMATION (Continued)

	INDUSTRY SEGMENTS
For the Nine Months Ended September 30, 2006	Commercial Banking		Mortgage			All Other			Eliminations			Total
Interest income	$	35,181,983	$	12,311		$	—		$	(54,303	)	$	35,139,991
Interest expense		14,478,192		41,992			—			(54,303	)		14,465,881
Net interest income (expense)		20,703,791		(29,681	)		—			—			20,674,110
Intersegment net interest income (expense)		54,303		(54,303	)		—			—			—
Other revenue from external sources		1,991,786		538,540			9,450			—			2,539,776
Intersegment other revenues		18,630		(18,630	)		—			—			—
Depreciation		444,237		1,049			6,101			—			451,387
Provision for loan losses		506,860		—			—			—			506,860
Segment profit (loss)		15,127,474		(120,946	)		(50,612	)		—			14,955,916
Segment assets		699,935,961		1,452,341			897,721			(3,120,262	)		699,165,761
Expenditures for premises and equipment		664,798		—			—			—			664,798
	INDUSTRY SEGMENTS
For the Three Months Ended September 30, 2007	Commercial Banking		Mortgage			All Other			Eliminations			Total
Interest income	$	12,857,397	$	4,290		$	—		$	(21,828	)	$	12,839,859
Interest expense		6,796,632		17,538			—			(21,828	)		6,792,342
Net interest income (expense)		6,060,765		(13,248	)		—			—			6,047,517
Intersegment net interest income (expense)		21,828		(21,828	)		—			—			—
Other revenue from external sources		595,244		163,635			3,150			—			762,029
Intersegment other revenues		6,210		(6,210	)		—			—			—
Depreciation		175,067		130			1,561			—			176,758
Provision for loan losses		1,257,754		—			—			—			1,257,754
Segment profit (loss)		2,637,147		(28,565	)		(11,582	)		—			2,597,000
Expenditures for premises and equipment		463,210		—			—			—			463,210
	INDUSTRY SEGMENTS
For the Three Months Ended September 30, 2006	Commercial Banking		Mortgage			All Other			Eliminations			Total
Interest income	$	12,607,621	$	4,903		$	—		$	(17,217	)	$	12,595,307
Interest expense		5,437,265		12,314			—			(17,217	)		5,432,362
Net interest income (expense)		7,170,356		(7,411	)		—			—			7,162,945
Intersegment net interest income (expense)		17,217		(17,217	)		—			—			—
Other revenue from external sources		647,074		139,673			3,150			—			789,897
Intersegment other revenues		6,210		(6,210	)		—			—			—
Depreciation		147,466		160			1,561			—			149,187
Provision for loan losses		110,520		—			—			—			110,520
Segment profit (loss)		5,235,171		(62,571	)		(10,511	)		—			5,162,089
Expenditures for premises and equipment		492,582		—			—			—			492,582

8

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 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; and 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 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, 2006 as filed in our annual report on form 10-K.

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

Liquidity and Capital Resources

Our liquidity and capital resources are monitored on a periodic basis by management as well as State and Federal regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy, our liquidity ratio of 20% at September 30, 2007 was considered satisfactory.

At September 30, 2007, our capital ratios were in excess of the requirements to be considered well capitalized under prompt corrective action provisions. The Board of Directors has approved the repurchase of up to $1 million of stock into treasury if it is in the best interest of the Company. On October 23, 2007, the Company purchased 20,250 shares of stock into treasury at a price of $13.50 per share. 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		Regulatory Requirement
Leverage capital ratios	10.37	%	10.23	%	5.00	%
Risk-based capital ratios:
Core capital	12.30		12.14		6.00
Total capital	13.33		13.17		10.00

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:

	September 30, 2007
Commitments to extend credit	$	89,426,000
Letters of credit		6,264,000
	$	95,690,000

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

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:

	September 30, 2007		December 31, 2006
	(Dollars in Thousands)
Cash and due from banks	$	15,419	$	18,585
Interest-bearing deposits in banks		1,727		295
Federal funds sold		22,400		5,500
Securities		123,557		91,077
Loans, net		564,168		556,416
Loans held for sale		—		666
Premises and equipment		10,496		9,936
Other assets		14,262		11,835
	$	752,029	$	694,310
Total deposits	$	654,035	$	594,873
Other borrowings		16,429		24,222
Other liabilities		5,052		4,017
Stockholders’ equity		76,513		71,198
	$	752,029	$	694,310

Our assets increased by 8.31% for the first nine months of 2007. Increases of $59.2 million in deposit growth, offset by decreases of $7.8 million in other borrowings were primarily used to fund purchases of investment securities and federal funds sold of $32.5 million and $16.9 million, respectively; as well as provide for a net increase of $7.8 million in loans during the first nine months of 2007. Our loan to deposit ratio, excluding loans held for sale, was 86% as of September 30, 2007 compared to 93% at December 31, 2006. Total deposits included $588 million of interest-bearing deposits at September 30, 2007, compared to $517 million at December 31, 2006. Our total equity has increased by $5.3 million year-to-date as net income of $7.7 million coupled with increases in unrealized gains on securities available for sale, net of tax, of $226,000 was offset by dividends paid of $2.6 million.

11

Results of Operations For The Three and Nine Months Ended September 30, 2007 and 2006

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

	Three Months Ended September 30,
	2007		2006
	(Dollars in Thousands)
Interest income	$	12,840	$	12,595
Interest expense		6,792		5,432
Net interest income		6,048		7,163
Provision for loan losses		1,258		111
Other income		762		790
Other expense		2,955		2,680
Pretax income		2,597		5,162
Income taxes		936		1,961
Net income	$	1,661	$	3,201

	Nine Months Ended September 30,
	2007		2006
	(Dollars in Thousands)
Interest income	$	39,342	$	35,140
Interest expense		19,497		14,466
Net interest income		19,845		20,674
Provision for loan losses		1,434		507
Other income		2,335		2,540
Other expense		8,571		7,751
Pretax income		12,175		14,956
Income taxes		4,509		5,572
Net income	$	7,666	$	9,384

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Our net interest income decreased by $1,115,000 and $829,000 in the third quarter and first nine months of 2007 respectively, as compared to the same periods in 2006. Our net yield on average interest-earning assets decreased to 3.86% in the first nine months of 2007 as compared to 4.38% in the first nine months of 2006. Our net yield on average interest-earning assets was 4.31% for the entire year of 2006. The decrease in net interest income is primarily attributed to an increase in the cost of interest-bearing liabilities, resulting in increased interest expense, as well as slower loan growth as compared to the same period in 2006. Our net cost of interest-bearing liabilities increased to 4.63% during the first nine months of 2007 compared to 3.82% for the same period in 2006. The increase in interest expense is largely the result of the strong competition for deposits in our market area. Our yields on loans increased to 8.22% in the first nine months of 2007 compared to 7.96% in the first nine months of 2006. Although our yields on loans have increased over 2006, we reversed approximately $888,000 of year-to-date accrued interest income during the third quarter of 2007 on loans placed on nonaccrual, resulting in a decrease of approximately 16 basis points in our net yield on interest-earning assets for the first nine months of 2007.

The provision for loan losses amounted to $1,258,000 and $1,434,000 for the third quarter and first nine months of 2007, respectively. The increase in the provision for loan losses is primarily attributed to our estimates of impairments in loans placed on nonaccrual during the quarter ended September 30, 2007. The amounts provided are indicative of our assessment of the inherent risk in the loan portfolio at September 30, 2007. The allowance for loan losses as a percentage of net loans was 1.13% at September 30, 2007 as compared to .93% at December 31, 2006. 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. Please see the information on page 15 for a further discussion of our allowance for loan losses methodology.

The following table shows our nonperforming assets for the periods ended September 30, 2007, December 31, 2006, and September 30, 2006:

	Sept. 30, 2007		December 31, 2006		Sept. 30, 2006
	(Dollars in Thousands)
Nonaccrual loans	$	17,330	$	416	$	1,036
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		3,206		1,001		1,388
Restructured loans		0		0		0
Total nonperforming loans	$	20,536	$	1,417	$	2,424
Other real estate		1,586		1,411		262
Total nonperforming assets	$	22,122	$	2,828	$	2,686

Nonperforming assets consist of nonaccrual loans, loans restructured due to the debtors’ financial difficulties, loans past due 90 days or more as to interest or principal and still accruing, and other real estate owned, which is real estate acquired through foreclosure. Nonaccrual loans are those loans on which recognition of interest income has been discontinued. Restructured loans generally allow for an extension of the original repayment period or a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan, or generally when loans are 90 days or more past due, the accrual of interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection.

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Interest payments received on nonaccrual loans are either applied against principal or reported as income according to management’s judgment as to the collectibility of principal. Loans are returned to an accrual status when those factors that indicated doubtful collectibility on a timely basis no longer exist. Other real estate owned is initially recorded at the lower of cost or estimated value at the date of acquisition. A provision for estimated losses is recorded when a subsequent decline in value occurs.

Nonperforming assets at September 30, 2007 amounted to approximately $22.1 million, or 3.87% of total loans and other real estate. This compares to approximately $2.8 million or .50% of total loans and other real estate at December 31, 2006, and $2.7 million or .48% at September 30, 2006.

The increase in nonperforming assets is primarily attributed to increases in nonaccrual loans and loans past due 90 days or more and still accruing. The increase in nonaccrual loans are represented by five separate loan relationships involving real estate development and construction in our local market and that comprise approximately 90% of the $17.2 million in loans placed on nonaccrual during the quarter ended September 30, 2007. Of these relationships, a development loan in the amount of $7.7 million, comprising 150 developed lots and over 60 undeveloped lots was placed on nonaccrual during the quarter. As a result of the impairment of this development loan, an additional provision to the loan loss reserve was made during September of approximately $867,000. The property, which is located in our market, was foreclosed in October and placed into other real estate. Subsequent to the foreclosure, the Company has been in conversations with interested parties involving a potential sale of the development. Another of these relationships is comprised of 16 construction loans in our local market for which the homes have been completed and are being marketed for sale by the borrower. The change in status of all of these loans placed on nonaccrual is primarily related to the borrowers’ illiquidity, as well as increased levels of lot and completed home inventories in our market. The increase in loans 90 days or more and still accruing is primarily attributed to construction loans to several borrowers that are fully secured by real estate, and that have all been brought current as to interest or have been paid in full subsequent to September 30, 2007.

The increase in other real estate is primarily attributed to the foreclosure of a single family detached residential dwelling as well as a vacant commercial lot, both of which are valued well in excess of the carrying value and that the Company is actively marketing for resale.

Subsequent to September 30, 2007, the Company became aware of two separate development loans totaling $3.8 million about which there is significant doubt as to the ability of the borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status. The loans were not 90 days or more past due as to interest or principal at September 30, 2007. The Company feels that if uncorrected, the relationship will become nonperforming prior to the end of the next reporting period. At present, the Company has evaluated the underlying collateral securing the loan and is of the opinion that it adequately protects against incurring a loss.

Although the Company is concerned with the significant increase in nonperforming assets at September 30, 2007, we are of the opinion that our long term relationships with these customers, familiarity with our local real estate markets and adequate collateral positions in these loans will help to minimize any losses that may arise as we continue to work with these relationships going forward. We believe that the performance problems existing in our real estate portfolio are a direct result of softening real estate activity and not indicative of a weakness in previous or current underwriting standards regarding real estate lending. Presently, the vast majority of the Company’s credits in the residential development and construction loan category of our portfolio continue to perform; however, management cannot predict the impact of future economic changes in our nonperforming assets.

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Information regarding certain loans and allowance for loan loss data through September 30, 2007 and 2006 is as follows:

	Nine Months Ended September 30,
	2007			2006
	(Dollars in Thousands)
Average amount of loans outstanding	$	561,574		$	544,150
Balance of allowance for loan losses at beginning of period	$	5,230		$	4,972
Loans charged off
Real estate		(186	)		—
Commercial		(14	)		(133	)
Consumer installment		(44	)		(48	)
		(244	)		(181	)
Loans recovered
Real estate		1			—
Commercial		1			—
Consumer installment		11			17
		13			17
Net (charge-offs)/ recoveries		(231	)		(164	)
Additions to allowance charged to operating expense during period		1,434			507
Balance of allowance for loan losses at end of period	$	6,433		$	5,315
Ratio of net loans charged off during the period to average loans outstanding		.04	%		.03	%

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 judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. In assessing the adequacy, management relies predominately on its ongoing review of the loan portfolio. This review takes into consideration the judgments of the responsible lending officers and senior management, and also those of regulatory agencies that review the loan portfolio as part of the regular bank examination process, as well as reviews conducted by our outside loan review firm. In evaluating the allowance, management also considers our loan loss experience, the amount of past due and nonperforming loans, current and anticipated economic conditions, lender requirements and other appropriate information. Certain nonperforming loans are individually assessed for impairment under Statement of Financial Accounting Standards (“SFAS”) No. 114 and assigned specific allocations. Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations.

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Noninterest income

Other operating income decreased by $28,000 and $204,000 in the third quarter and first nine months of 2007, respectively, as compared to the same periods in 2006. The year-to-date decreases are due primarily to decreased service charges on deposit accounts of $129,000, decreases of $47,000 in mortgage banking income as a result of decreased mortgage activity and decreased other service charges and fees of $28,000. Decreases in service charges on deposit accounts are primarily attributed to the continued conversion of our existing service charge accounts to non service charge checking accounts.

Noninterest expense

Other expenses have increased $275,000 in the third quarter of 2007 compared to 2006 and have increased $820,000 for the first nine months of 2007 as compared to the same periods in 2006. Other expenses have increased during the first nine months of 2007 compared to 2006, primarily as a result of increased salaries and employee benefits, net of capitalized loan fees, of $548,000, increased occupancy and equipment expense of $150,000 and increases in other operating expenses of $122,000. Increases in salaries and employee benefits are primarily a result of increases in staff as a result of opening our new branch in April of 2007. The increase in occupancy and equipment expense is primarily attributed to increased depreciation expense of approximately $50,000 and increased ATM network fees of $40,000. The increase in other operating expenses is primarily attributed to increases in other real estate expense of $42,000, accounting and professional fees of $27,000 and stationery and supplies of $26,000. Our efficiency ratio for the nine months ending September 30, 2007 was 38.64% as we continue to rank at the top of our peer group percentile in the efficiency of our operations.

Income Taxes

We have provided for income taxes at an effective tax rate of 37% for the first nine months of 2007 as well as for the first nine months of 2006.

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.

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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 third quarter model reflects an increase of 28% in net interest income and an 8% increase in market value equity for a 200 basis point increase in rates. The same model shows a 4% decrease in net interest income and a 13% 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.

ITEM 4. CONTROLS AND PROCEDURES

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.

There have been no changes in our internal controls or in other factors that could affect internal controls subsequent to the date of this evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

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II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

	(a) Total number Of shares (or units) purchased	(b) Average price paid per share (or unit)	(c) Total number of shares (or units) purchased as part of plans or programs	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
10/23/2007	20,250 shares	$13.50	N/A	N/A

(a) The shares shown above were purchased in a single, unsolicited open-market transaction from an individual shareholder. The transaction was not pursuant to a stock repurchase plan.

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

(a) Exhibits.

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32	Certification of the Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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 7, 2007	By:	/s/ David H. Gill
		David H. Gill, President and CEO (Principal Executive Officer)
Date: November 7, 2007	By:	/s/ Thomas L. Redding
		Thomas L. Redding, Sr. Vice President and CFO (Principal Financial and Accounting Officer)

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