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, 2008

¨ 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 or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)	Smaller Reporting Company  ¨

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 August 5, 2008: 14,245,690; $2.50 par value.

HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX

		Page
PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Balance Sheets - June 30, 2008 and December 31, 2007	3
	Consolidated Statements of Operations and Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2008 and 2007	4
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2008 and 2007	5
	Notes to Consolidated Financial Statements	6-10
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-18
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4. Controls and Procedures	19
PART II.	OTHER INFORMATION
	Item 6 - Exhibits and Reports on Form 8-K	20
	Signatures	21

PART I - FINANCIAL INFORMATION

FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2008 AND DECEMBER 31, 2007

(Unaudited)

	2008			2007
Assets
Cash and due from banks	$	15,767,337		$	16,826,236
Interest bearing deposits in banks		122,361			2,731,987
Federal funds sold		—			9,500,000
Securities available for sale, at fair value		73,591,942			87,717,716
Securities held to maturity, at cost, (fair value 2008 $4,153,442; 2007 $4,143,401)		4,162,579			4,164,690
Restricted equity securities, at cost		1,877,851			1,897,751
Loans held for sale		882,922			950,405
Loans		554,544,204			569,387,551
Less allowance for loan losses		10,219,776			7,657,387
Loans, net		544,324,428			561,730,164
Premises and equipment		10,003,330			10,341,368
Other real estate		16,666,464			10,394,433
Other assets		13,004,275			12,741,299
Total assets	$	680,403,489		$	718,996,049
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	68,644,826		$	71,388,083
Interest-bearing		524,853,366			554,463,038
Total deposits		593,498,192			625,851,121
Federal funds purchased		2,000,000			—
Other borrowings		7,383,812			13,424,498
Other liabilities		3,733,243			4,186,288
Total liabilities		606,615,247			643,461,907
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		39,588,849			40,644,829
Accumulated other comprehensive income (loss)		(193,437	)		435,733
Treasury stock, 143,060 and 138,560 shares, respectively		(2,318,604	)		(2,257,854	)
Total stockholders’ equity		73,788,242			75,534,142
Total liabilities and stockholders’ equity	$	680,403,489		$	718,996,049

See Notes to Consolidated Financial Statements.

3

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Interest income
Loans	$	7,572,206		$	11,787,540		$	17,351,110		$	23,412,808
Taxable securities		886,473			1,285,083			2,037,107			2,335,180
Nontaxable securities		86,881			87,775			166,326			176,884
Deposits in banks		2,168			1,659			33,327			6,896
Federal funds sold		36,899			360,902			141,701			570,922
Total interest income		8,584,627			13,522,959			19,729,571			26,502,690
Interest expense
Deposits		4,938,220			6,315,854			10,747,138			12,089,264
Other borrowings		26,265			307,869			144,344			615,764
Total interest expense		4,964,485			6,623,723			10,891,482			12,705,028
Net interest income		3,620,142			6,899,236			8,838,089			13,797,662
Provision for loan losses		1,525,750			164,000			2,635,750			176,500
Net interest income after provision for loan losses		2,094,392			6,735,236			6,202,339			13,621,162
Other operating income
Service charges on deposit accounts		339,116			338,671			676,178			675,761
Other service charges and fees		277,571			281,141			532,099			570,319
Mortgage banking income		121,579			169,198			242,184			327,490
Total other income		738,266			789,010			1,450,461			1,573,570
Other expenses
Salaries and employee benefits		1,800,029			1,768,113			3,665,766			3,532,006
Occupancy and equipment expenses		485,035			476,700			966,909			914,771
Other real estate writedowns		842,606			—			951,670			—
Other operating expenses		644,508			612,127			1,276,611			1,169,824
Total other expenses		3,772,178			2,856,940			6,860,956			5,616,601
Income (loss) before income taxes		(939,520	)		4,667,306			791,844			9,578,131
Income tax expense (benefit)		(502,360	)		1,704,932			138,340			3,572,433
Net income (loss)		(437,160	)		2,962,374			653,504			6,005,698
Other comprehensive loss:
Unrealized losses on securities available for sale, net of tax		(1,015,911	)		(324,540	)		(629,170	)		(244,115	)
Comprehensive income (loss)	$	(1,453,071	)	$	2,637,834		$	24,334		$	5,761,583
Earnings (loss) per share	$	(0.03	)	$	0.21		$	0.05		$	0.42
Weighted average shares outstanding		14,245,690			14,321,468			14,245,739			14,321,468
Cash dividends per share	$	0.06		$	0.06		$	0.12		$	0.12

See Notes to Consolidated Financial Statements.

4

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)

	2008			2007
OPERATING ACTIVITIES
Net income	$	653,504		$	6,005,698
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		347,211			324,910
Net (increase) decrease in loans held for sale		67,483			(221,573	)
Provision for loan losses		2,635,750			176,500
Writedowns of other real estate owned		951,670			—
Net losses on sale of other real estate		—			13,522
(Increase) decrease in interest receivable		2,793,382			(775,810	)
Increase (decrease) in interest payable		(837,190	)		395,141
Net other operating activities		(2,348,095	)		72,853
Net cash provided by operating activities		4,263,715			5,991,241
INVESTING ACTIVITIES
Purchases of securities available for sale		(34,587,704	)		(46,172,928	)
Purchases of securities held to maturity		—			(1,001,140	)
Proceeds from maturities of securities available for sale		47,760,190			21,683,708
Proceeds from maturities of securities held to maturity		2,111			103,120
Retirement of restricted equity securities		19,900			471,900
Net decrease in federal funds sold		9,500,000			700,000
Net (increase) decrease in interest-bearing deposits in banks		2,609,626			(534,173	)
Net (increase) decrease in loans		7,255,444			(8,813,342	)
Proceeds from sale of other real estate		290,841			370,541
Purchase of premises and equipment		(9,173	)		(598,308	)
Net cash (used in) provided by investing activities		32,841,235			(33,790,622	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits		(32,352,929	)		37,690,039
Net increase in federal funds purchased		2,000,000			—
Net repayments of other borrowings		(6,040,686	)		(10,377,974	)
Dividends paid		(1,709,484	)		(1,718,576	)
Purchase of treasury stock		(60,750	)		—
Net cash provided by (used in) financing activities		(38,163,849	)		25,593,489
Net decrease in cash and due from banks		(1,058,899	)		(2,205,892	)
Cash and due from banks, beginning of period		16,826,236			18,584,790
Cash and due from banks, end of period	$	15,767,337		$	16,378,898
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	11,728,672		$	12,309,887
Income taxes	$	1,339,742		$	3,678,299
Noncash transactions
Other real estate acquired in settlement of loans	$	7,514,542		$	787,956
Financed sales of other real estate owned	$	—		$	73,845

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 six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year. Adoption of New Accounting Standards Fair Value Option and Fair Value Measurements In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy prioritizing the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. As permitted under FASB Staff Position No. FAS 157-2, the Company has elected to defer the application of FAS 157 to nonfinancial assets and liabilities until January 1, 2009. The Company does not believe the impact will be material to the financial condition of the Company. In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

6

Fair Value Measurement

Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value.

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Assets and Liabilities Measured on a Recurring Basis

Fair Value Measurements at June 30, 2008, using:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities	$	—	$	73,591,942	$	—

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (“SFAS 114”). The fair value of impaired loans is estimated using one of several methods, including the present value of future cash flows discounted at the loan’s effective interest rate or a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. In accordance with SFAS 157, impaired loans where an allowance is established based on fair value of collateral require classification in the fair value hierarchy.

7

The Company measures the fair value of collateral dependent impaired loans based on the fair value of the collateral securing these loans. These measurements are classified as Level 3 within the valuation hierarchy. All impaired loans are secured by real estate. The fair value of these real estate properties is generally determined based upon appraisals performed by a certified or licensed appraiser using inputs such as absorption rates, capitalization rates, and comparables. Management also considers other factors or recent developments which could result in adjustments to the valuation. Impaired loans are reviewed and evaluated in at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Assets and Liabilities Measured on a Nonrecurring Basis

Fair Value Measurements at June 30, 2008, using:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	—	$	—	$	49,839,515

8

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, 2007 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 Six Months Ended June 30, 2008	Commercial Banking		Mortgage			All Other			Eliminations			Total
Interest income	$	19,749,685	$	4,948		$	—		$	(25,062	)	$	19,729,571
Interest expense		10,896,430		20,114			—			(25,062	)		10,891,482
Net interest income (expense)		8,853,255		(15,166	)		—			—			8,838,089
Intersegment net interest income (expense)		15,166		(15,166	)		—			—			—
Other revenue from external sources		1,201,977		242,184			6,300			—			1,450,461
Intersegment other revenues		12,420		(12,420	)		—			—			—
Depreciation		343,830		259			3,122			—			347,211
Provision for loan losses		2,635,750		—			—			—			2,635,750
Segment profit (loss)		903,060		(100,926	)		(10,290	)		—			791,844
Segment assets		680,928,577		1,598,792			273,386			(2,397,266	)		680,403,489
Expenditures for premises and equipment		9,173		—			—			—			9,173

9

NOTE 2. SUPPLEMENTAL SEGMENT INFORMATION (Continued)

	INDUSTRY SEGMENTS
For the Six Months Ended June 30, 2007	Commercial Banking		Mortgage		All Other		Eliminations		Total
Interest income	$	26,534,043	$	8,811	$	—	$	(40,164)	$	26,502,690
Interest expense		12,713,839		31,353		—		(40,164)		12,705,028
Net interest income (expense)		13,820,204		(22,542)		—		—		13,797,662
Intersegment net interest income (expense)		40,164		(40,164)		—		—		—
Other revenue from external sources		1,239,780		327,490		6,300		—		1,573,570
Intersegment other revenues		12,420		(12,420)		—		—		—
Depreciation		321,468		320		3,122		—		324,910
Provision for loan losses		176,500		—		—		—		176,500
Segment profit (loss)		9,690,137		(80,166)		(31,840)		—		9,578,131
Segment assets		727,238,458		1,758,368		1,096,632		(3,547,347)		726,546,111
Expenditures for premises and equipment		598,308		—		—		—		598,308
	INDUSTRY SEGMENTS
For the Three Months Ended June 30, 2008	Commercial Banking		Mortgage		All Other		Eliminations		Total
Interest income	$	8,591,313	$	1,996	$	—	$	(8,682)	$	8,584,627
Interest expense		4,966,481		6,686		—		(8,682)		4,964,485
Net interest income (expense)		3,624,832		(4,690)		—		—		3,620,142
Intersegment net interest income (expense)		4,690		(4,690)		—		—		—
Other revenue from external sources		613,537		121,579		3,150		—		738,266
Intersegment other revenues		6,210		(6,210)		—		—		—
Depreciation		169,046		130		1,561		—		170,737
Provision for loan losses		1,525,750		—		—		—		1,525,750
Segment loss		(892,985)		(44,088)		(2,447)		—		(939,520)
Expenditures for premises and equipment		9,173		—		—		—		9,173
	INDUSTRY SEGMENTS
For the Three Months Ended June 30, 2007	Commercial Banking		Mortgage		All Other		Eliminations		Total
Interest income	$	13,539,810	$	4,422	$	—	$	(21,273)	$	13,522,959
Interest expense		6,628,145		16,851		—		(21,273)		6,623,723
Net interest income (expense)		6,911,665		(12,429)		—		—		6,899,236
Intersegment net interest income (expense)		30,051		(30,051)		—		—		—
Other revenue from external sources		616,662		169,198		3,150		—		789,010
Intersegment other revenues		6,210		(6,210)		—		—		—
Depreciation		174,056		160		1,561		—		175,777
Provision for loan losses		164,000		—		—		—		164,000
Segment profit (loss)		4,728,370		(47,125)		(13,939)		—		4,667,306
Expenditures for premises and equipment		173,775		—		—		—		173,775

10

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 ( the “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, 2007 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 and are particularly susceptible to significant change. 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.

Determination of the Bank’s allowance for loan losses as well as allowance for other real estate owned have been identified as critical accounting policies. 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. The allowance for other real estate owned is determined primarily on the use of external appraisals.

11

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 11.39% at June 30, 2008 was considered satisfactory.

At June 30, 2008, 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				Minimum Regulatory Requirement
	Consolidated		Bank
Leverage capital ratios	10.73	%	10.69	%	5.00	%
Risk-based capital ratios:
Core capital	12.44		12.40		6.00
Total capital	13.70		13.65		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:

	June 30, 2008
Commitments to extend credit	$	70,263,000
Letters of credit		6,111,000
	$	76,374,000

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.

12

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, 2008		December 31, 2007
	(Dollars in Thousands)
Cash and due from banks	$	15,767	$	16,826
Interest-bearing deposits in banks		122		2,732
Federal funds sold		—		9,500
Securities		79,633		93,781
Loans, net		544,324		561,730
Loans held for sale		883		950
Premises and equipment		10,003		10,341
Other assets		29,671		23,136
	$	680,403	$	718,996
Total deposits	$	593,498	$	625,851
Other borrowings		9,384		13,424
Other liabilities		3,733		4,187
Stockholders’ equity		73,788		75,534
	$	680,403	$	718,996

Our assets declined by 5.37% for the first six months of 2008. Net loans decreased by $17.4 million, primarily due to the transfer of approximately $7.5 million to other real estate owned as a result of foreclosures during the first six months of 2008. The remaining decrease in net outstanding loans is a result of normal pay down activity as we have experienced a slowing of new loan production during the second quarter of 2008. Decreases in interest-bearing deposits of $2.6 million, federal funds sold of $9.5 million and investment securities of $14.1 million were primarily used to offset decreases in time deposits for the first six months of 2008. Total deposits decreased $32.3 million during the first six months of 2008. The decrease in deposit accounts was primarily a result of decreases in time deposits of $33.8 million, offset by slight increases in interest bearing checking, savings and demand deposits of $1.5 million. This reflects a strategic decision by the Company to allow higher-priced time deposits where there was no other customer relationship to lapse. We monitor our liquidity position daily to achieve earnings enhancement as well as meet regulatory requirements while funding our obligations. Other borrowings decreased $4.0 million during the first six months of 2008 as our Federal Home Loan Bank advances decreased by $6.0 million, offset by an increase in federal funds purchased of $2.0 million. The Company takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of funding. Our total equity has decreased by $1.7 million year to date as net income of $653,000 was offset by increased unrealized losses on securities available for sale, net of tax, of $629,000, purchases of treasury stock of $61,000 and by dividends paid of $1.7 million.

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Results of Operations For The Three and Six Months Ended June 30, 2008 and 2007

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

	Three Months Ended June 30,
	2008			2007
	(Dollars in Thousands)
Interest income	$	8,584		$	13,523
Interest expense		4,964			6,624
Net interest income		3,620			6,899
Provision for loan losses		1,526			164
Other income		738			789
Other expense		3,772			2,857
Pretax income (loss)		(940	)		4,667
Income taxes (benefit)		(503	)		1,705
Net income (loss)	$	(437	)	$	2,962
	Six Months Ended June 30,
	2008			2007
	(Dollars in Thousands)
Interest income	$	19,729		$	26,503
Interest expense		10,891			12,705
Net interest income		8,838			13,798
Provision for loan losses		2,636			176
Other income		1,450			1,573
Other expense		6,861			5,617
Pretax income		791			9,578
Income taxes		138			3,572
Net income	$	653		$	6,006

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Our second quarter results were highlighted by increased provisions for loan losses and compressed net interest margins, which together contributed to a net loss of $437,000, or $0.03 per share. These factors have also contributed to a decrease in net earnings for the first six months of 2008 compared to the same period in 2007. Net earnings for the six months ending June 30, 2008 were $653,000, or $0.05 per share compared to $6.0 million or $0.42 per share for the same period in 2007.

Our net interest income decreased by $3,279,000 in the second quarter of 2008 and decreased by $4,960,000 for the first six months of 2008 as compared to the same periods in 2007. Our net yield on average interest-earning assets decreased to 2.68% in the first six months of 2008 as compared to 4.05% in the first six months of 2007. The decrease in net yield on average earning assets is primarily due to a reduction in interest income on loans as a result of a decrease in average outstanding loans for the first six months of 2008, coupled with decreases in the Prime lending rate from the end of 2007. Our net yield on average interest-earning assets was 3.64% for the entire year of 2007. Our increasing levels of nonperforming loans have also negatively affected our net interest margin. Interest income that would have been recorded on nonaccrual loans since the end of 2007 amounted to $3.4 million during the first six months of 2008, effectively lowering our net yield on average earning assets by 103 basis points. Our net cost on interest-bearing liabilities decreased to 3.98% during the first six months of 2008 compared to 4.56% for the same period in 2007. The decrease in interest expense is largely the result of a lower cost of funds during the first six months of 2008.

The provision for loan losses amounted to $1,526,000 and $2,636,000 for the second quarter and first six months of 2008, respectively. The amounts provided are indicative of our assessment of the inherent risk in the loan portfolio at June 30, 2008. The allowance for loan losses as a percentage of total loans was 1.84% at June 30, 2008 as compared to 1.34% at December 31, 2007. 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. Please see the information on page 16 for a further discussion of our allowance for loan losses methodology.

The following table shows our nonperforming assets for the periods ended June 30, 2008, December 31, 2007, and June 30, 2007:

	June 30, 2008		December 31, 2007		June 30, 2007
	(Dollars in Thousands)
Nonaccrual loans	$	50,045	$	32,744	$	106
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		4,682		4,714		5,378
Restructured loans		0		0		0
Total nonperforming loans	$	54,727	$	37,458	$	5,484
Other real estate		16,666		10,394		1,741
Total nonperforming assets	$	71,393	$	47,852	$	7,225

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.

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When management believes there is sufficient doubt to the collectibility of principal or interest on any loan based on its contractual terms, 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. 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 June 30, 2008 amounted to approximately $71.4 million, or 12.50% of total loans and other real estate. This compares to approximately $47.8 million or 8.25% of total loans and other real estate at December 31, 2007, and $7.2 million or 1.26% at June 30, 2007. The increase in nonperforming assets is primarily attributable to the significant slowdown in residential real estate sales that began in the summer of 2007 and has continued through the first half of 2008. With the significant slowing of home and land sales, the prices of homes and land have declined. Therefore, many of our customers who develop and sell residential real estate cannot service their loans because they are not generating sufficient revenue, resulting in the significant increase in nonaccrual loans.

Nonaccrual loans increased by $17.3 million or 53% during the six month period ended June 30, 2008. There was significant movement within these loans during the quarter as $33.3 million went on nonaccrual status, $7.5 million went into foreclosure, and $8.5 million returned to accrual status through the repayment of previously accrued interest. The ten largest nonaccrual loan relationships comprise $39.7 million or 79% of the total and all are collateralized by residential real estate.

Other real estate owned increased by $6.3 million, or 60% during the six month period ended June 30, 2008. During the first six months of 2008, we foreclosed on $6.6 million of real estate, net of write downs of $952,000, and sold $290,000 of real estate. The total balance of $16.7 million at June 30, 2008 is distributed as follows; residential development (60%), homes and lots (27%) and commercial real estate (13%).

The level of nonperforming assets is a matter of significant concern to the Company, which is actively working to resolve problem credits and to liquidate Bank owned real estate as appropriate purchasers can be found. Approximately 20% of the nonperforming loans are represented by three customer relationships which are currently in bankruptcy reorganization. The Company is represented by experienced legal counsel who is working to ensure that its interests are protected and that the Company achieves maximum collection. The senior management of the Company meets with loan officers on a weekly basis to review nonperforming loans and to ensure that the Company is following its most effective plan for reduction or restructuring of these credits. An additional committee of the Board of Directors has been formed to assist management in the evaluation and liquidation of owned real estate. With a declining housing sales market and lowering real property values, liquidation of real estate at prices favorable to the Company is difficult. The Company continues to write down property or record reserves as prudent.

Subsequent to June 30, 2008 the lead participant in two loan relationships totaling $6.6 million for the Company’s portion of the indebtedness notified the Company that the borrower was delinquent in payment of a scheduled interest payment and that there was some uncertainty as to whether payment would be received. The loan was not 90 days or more past due as to interest or principal at June 30, 2008. The Company feels that if uncorrected, the relationships will become nonperforming prior to the end of the next reporting period. The loans are secured by real property that fully secured the loans at their origination, but at the time of this filing the Company does not have a current appraisal to determine if there has been deterioration in the underlying collateral values.

16

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, 2008 and 2007 is as follows:

	Six Months Ended June 30,
	2008			2007
	(Dollars in Thousands)
Average amount of loans outstanding	$	564,527		$	556,788
Balance of allowance for loan losses at beginning of period	$	7,657		$	5,230
Loans charged off
Real estate		(60	)		(126	)
Commercial		—			—
Consumer installment		(16	)		(5	)
		(76	)		(131	)
Loans recovered
Real estate		—			—
Commercial		—			1
Consumer installment		2			10
		2			11
Net (charge-offs)/ recoveries		(74	)		(120	)
Additions to allowance charged to operating expense during period		2,636			176
Balance of allowance for loan losses at end of period	$	10,219		$	5,286
Ratio of net loans charged off during the period to average loans outstanding		.01	%		.02	%

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.

17

Certain nonperforming loans are individually assessed for impairment under Statement of Financial Accounting Standards (“SFAS”) No. 114 and assigned specific allocations. The valuation allowance related to impaired loans amounted to $6.5 million as of June 30, 2008. Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations.

Noninterest income

Other income decreased by $51,000 and $123,000 in the second quarter and first six months of 2008, respectively, as compared to the same periods in 2007. The year-to-date decreases are due primarily to a decrease in other service charges and fees of $38,000, as well as decreased mortgage banking income of $85,000 as a result of decreased mortgage activity.

Noninterest expense

Other expenses have increased by $915,000 in the second quarter of 2008 and have increased $1,244,000 for the first six months of 2008 as compared to the same periods in 2007. Other expenses have increased during the first six months of 2008 compared to 2007 as a result of increased salaries and employee benefits, net of capitalized loan fees, of $134,000, increased occupancy and equipment expense of $52,000 and increases in other operating expenses of $1,058,000. The increase in salaries and employee benefits is primarily attributed to increases in salaries of approximately $84,000, coupled with decreases in capitalized loan fees of $218,000, offset by decreases in incentives and profit sharing expenses accrued of $187,000. The increase in occupancy and equipment expense is primarily attributed to increased depreciation expense of approximately $22,000. The increase in other operating expenses is primarily attributed to increases in other expenses attributed to carrying other real estate owned of $54,000, increases in FDIC insurance premiums of $182,000, and by decreases in advertising expenses of $56,000.

Income Taxes

Income tax expense for the six months ending June 30, 2008 declined $3.4 million from the year-ago period. The decrease from the year-ago period is primarily attributable to 92% less income before income tax and a decline in the effective tax rate from 37% to 17%. The reduction in the effective tax rate results from a decline in income before income tax and a lower estimated State tax liability resulting from low income housing and other credits.

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 second quarter model reflects an increase of 25% 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 2% 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.

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 or 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 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: August 7, 2008	BY:	/s/ David H. Gill
		David H. Gill, President and CEO
		(Principal Executive Officer)
DATE: August 7, 2008	BY:	/s/ Thomas L. Redding
		Thomas L. Redding, Sr. Vice President and CFO
		(Principal Financial and Accounting Officer)

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