UNITED STATES

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, 2010

OR

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

For the Transition Period from              to             

Commission file number 0-49789

Henry County Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Georgia	58-1485511
(State of Incorporation)	(I.R.S. Employer Identification No.)
4806 N. Henry Blvd., Stockbridge, Georgia	30281
Address of Principal Executive Offices	(Zip Code)

(770) 474-7293

(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x

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

Common stock, par value $.10 per share: 14,245,690 shares outstanding as of July 30, 2010

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

INDEX

		Page
PART I.	FINANCIAL INFORMATION	3
	Item 1. Financial Statements	3
	Consolidated Balance Sheets – June 30, 2010 and December 31, 2009	3
	Consolidated Statements of Operations – Three and Six Months Ended June 30, 2010 and 2009	4
	Consolidated Statements of Comprehensive Loss – Three and Six Months Ended June 30, 2010 and 2009	5
	Consolidated Statements of Stockholders’ Equity – Six Months Ended June 30, 2010 and 2009	6
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2010 and 2009	7-8
	Notes to Consolidated Financial Statements	9-29
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30-49
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
	Item 4. Controls and Procedures	50
PART II.	OTHER INFORMATION	51
	Item 5. Other Information	51
	Item 6. Exhibits and Reports on Form 8-K	52
	Signatures	53

2

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)	June 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	11,813		$	11,887
Interest-bearing excess Federal Reserve balances		30,000			25,700
Interest-bearing deposits in banks		5,420			635
Securities available for sale, at fair value		56,150			72,177
Securities held to maturity (fair value approximates $704 and $705)		695			695
Restricted equity securities, at cost		1,266			1,266
Loans held for sale		—			499
Loans		408,207			434,891
Less allowance for loan losses		11,430			13,324
Loans, net		396,777			421,567
Premises and equipment		9,237			9,481
Foreclosed properties		65,336			49,732
Income taxes receivable		534			17,457
Other assets		3,066			3,552
Total assets	$	580,294		$	614,648
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	68,411		$	59,831
Interest-bearing		485,872			526,270
Total deposits		554,283			586,101
Other borrowings		708			1,436
Other liabilities		4,040			3,784
Total liabilities		559,031			591,321
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; none issued Common stock, par value $.10 and $2.50, respectively; 50,000,000 shares authorized; 14,388,749.6 shares issued		1,439			35,972
Capital surplus		35,273			740
Accumulated deficit		(13,867	)		(12,491	)
Accumulated other comprehensive income		737			1,425
Less cost of treasury stock, 143,060 shares		(2,319	)		(2,319	)
Total stockholders’ equity		21,263			23,327
Total liabilities and stockholders’ equity	$	580,294		$	614,648

See accompanying notes to consolidated financial statements.

3

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except share and per share amounts)	2010			2009			2010			2009
Interest income
Loans	$	4,706		$	3,313		$	9,828		$	9,193
Taxable securities		453			594			944			1,193
Nontaxable securities		43			68			91			133
Deposits in banks		16			11			20			14
Federal Reserve balances		19			—			36			—
Federal funds sold		—			—			—			10
Total interest income		5,237			3,986			10,919			10,543
Interest expense
Deposits		2,481			3,790			5,330			7,627
Other borrowings		3			14			14			28
Total interest expense		2,484			3,804			5,344			7,655
Net interest income		2,753			182			5,575			2,888
Provision for (recovery of) loan losses		2,180			12,340			(696	)		13,940
Net interest income after provision for (recovery of) loan losses		573			(12,158	)		6,271			(11,052	)
Other operating income
Service charges on deposit accounts		463			351			906			659
Other service charges and fees		314			222			514			454
Securities gains (losses), net		175			—			987			(275	)
Mortgage banking income		—			158			13			254
Total other operating income		952			731			2,420			1,092
Other expenses
Salaries and employee benefits		1,313			1,743			2,652			3,442
Occupancy and equipment expenses		357			386			734			861
Foreclosed properties, net		4,301			1,625			4,729			2,525
FDIC and regulatory		582			604			969			765
Other operating expenses		517			566			983			1,175
Total other expenses		7,070			4,924			10,067			8,768
Loss before income taxes		(5,545	)		(16,351	)		(1,376	)		(18,728	)
Income tax expense (benefit)		—			—			—			—
Net loss	$	(5,545	)	$	(16,351	)	$	(1,376	)	$	(18,728	)
Loss per share	$	(0.39	)	$	(1.15	)	$	(0.10	)	$	(1.31	)
Weighted average shares outstanding		14,245,690			14,245,690			14,245,690			14,245,690

See accompanying notes to consolidated financial statements.

4

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2010			2009			2010			2009
Net loss	$	(5,545	)	$	(16,351	)	$	(1,376	)	$	(18,728	)
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) on investment securities available for sale arising during period		363			(485	)		299			(312	)
Reclassification adjustment for gains on sale of securities available for sale realized in earnings		(175	)		—			(987	)		—
Associated income taxes		—			165			—			106
Total other comprehensive (loss) income, net of tax		188			(320	)		(688	)		(206	)
Total comprehensive loss	$	(5,357	)	$	(16,671	)	$	(2,064	)	$	(18,934	)

See accompanying notes to consolidated financial statements.

5

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Six months ended June 30, 2010 and 2009

(unaudited)

(in thousands)	Common Stock			Surplus		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income			Treasury Stock			Total Stockholders’ Equity
Balance, December 31, 2008	$	35,972		$	740	$	24,161		$	789		$	(2,319	)	$	59,343
Net loss		—			—		(18,728	)		—			—			(18,728	)
Other comprehensive loss		—			—		—			(206	)		—			(206	)
Balance, June 30, 2009	$	35,972		$	740	$	5,433		$	583		$	(2,319	)	$	40,409
Balance, December 31, 2009	$	35,972		$	740	$	(12,491	)	$	1,425		$	(2,319	)	$	23,327
Net loss		—			—		(1,376	)		—			—			(1,376	)
Change in par value of common stock from $2.50 per share to $.10 per share		(34,533	)		34,533		—			—			—			—
Other comprehensive loss		—			—		—			(688	)		—			(688	)
Balance, June 30, 2010	$	1,439		$	35,273	$	(13,867	)	$	737		$	(2,319	)	$	21,263

6

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30, 2010 and 2009

(unaudited)

(in thousands)	2010			2009
Operating Activities
Net loss	$	(1,376	)	$	(18,728	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		239			274
Decrease (increase) in loans held for sale		499			(853	)
Provision for (recovery of) loan losses		(696	)		13,940
Impairment losses on foreclosed properties		3,039			1,456
Gains on sale of securities available for sale		(987	)		—
Impairment losses on restricted equity securities		—			275
Net losses on sale of foreclosed properties		152			537
Gain on the sale of premises and equipment		(99	)		—
Decrease in interest receivable		380			2,311
Decrease in interest payable		(525	)		(31	)
Decrease in income taxes receivable		16,923			6,122
Net other operating activities		887			(212	)
Net cash provided by operating activities		18,436			5,091
Investing Activities
Purchases of securities available for sale		(33,074	)		(35,092	)
Proceeds from maturities of securities available for sale		25,960			23,439
Proceeds from sale of securities available for sale		23,440			—
Proceeds from maturities of securities held to maturity		—			2,316
Retirement of restricted equity securities		—			102
Net increase in interest-bearing excess Federal Reserve balances		(4,300	)		—
Net decrease in federal funds sold		—			14,300
Net increase in interest-bearing deposits in banks		(4,785	)		(54,661	)
Net decrease in loans		5,430			4,759
Additions to foreclosed properties		(261	)		(75	)
Proceeds from sale of foreclosed properties		1,522			4,320
Proceeds from sale of premises and equipment		104			—
Purchase of premises and equipment		—			(228	)
Net cash provided by (used in) investing activities		14,036			(40,820	)
Financing Activities
Net increase (decrease) in deposits		(31,818	)		37,005
Net repayments of other borrowings		(728	)		(663	)
Net cash provided by (used in) financing activities		(32,546	)		36,342
Net increase (decrease) in cash and due from banks		(74	)		613
Cash and due from banks, beginning of period		11,887			14,039
Cash and due from banks, end of period	$	11,813		$	14,652

See accompanying notes to consolidated financial statements.

7

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30, 2010 and 2009

(unaudited)

(in thousands)	2010			2009
Supplemental Disclosures of Cash Flow Information
Cash paid (received) for:
Interest	$	5,869		$	7,686
Income taxes	$	(16,923	)	$	(6,122	)
Noncash transactions
Other real estate acquired in settlement of loans	$	20,732		$	16,125
Financed sales of foreclosed properties	$	676		$	248

See accompanying notes to consolidated financial statements.

8

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1) BASIS OF PRESENTATION

The consolidated financial information for Henry County Bancshares, Inc. (the “Company”) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period. Certain amounts at December 31, 2009 and for the three and six months ended June 30, 2009 have been reclassified to conform to the current period presentation.

The results of operations for the six month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

2) COMMON STOCK

On May 18, 2010, the Company changed the number of authorized common shares from 30,000,000 shares to 50,000,000 shares. Concurrently, the Company also changed the par value of the common shares from $2.50 per share to $.10 per share. The excess of the par value of the $2.50 par value common stock over the par value of the $.10 par value common stock, on the total outstanding shares of 14,388,750, totaled $34.5 million, which has been credited to capital surplus.

3) RECENT OPERATING LOSSES AND IMPACT ON CAPITAL

The Company has been adversely impacted by the continuing deterioration of the Metropolitan Atlanta real estate market causing continuing losses at the Bank, resulting in the Bank being deemed significantly undercapitalized at June 30, 2010. On May 14, 2010, the Bank entered into a Stipulation and Consent Agreement with the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “Department”) (collectively, the “Supervisory Authorities”) agreeing to the issuance of a Consent Order (the “Order”). The Order stipulates, among other conditions, that the Bank reach and maintain a Tier 1 capital ratio equal to or exceeding 8%. There is no assurance that the Bank’s capital can be increased to the level required by the Supervisory Authorities. Also, should the Bank’s capital not be increased to the level set forth in the Order, it is uncertain what action the Supervisory Authorities will take. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

9

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3) RECENT OPERATING LOSSES AND IMPACT ON CAPITAL, continued

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

Actions have been initiated to mitigate lending exposure, strengthen the loan portfolio, and protect the Bank’s collateral interests, as well as to reduce operating costs and provide for positive cash flows throughout 2010. Notwithstanding these efforts, the Bank sustained a loss for the first six months of 2010 of $1,376,000 primarily resulting from impairment charges and increased operating expenses on foreclosed properties plus additional losses on problem loans resulting primarily from continued declines in value of the underlying real estate securing these problem loans.

The Capital Committee of the Board of Directors continues to review various alternatives for increasing the Bank’s capital and has asked management to prepare the necessary documentation to use in an offering of common stock at such time that it is deemed appropriate to offer common stock for sale to its current stockholders and other qualified investors. However, there can be no assurance that any offering of common stock will be successful in raising sufficient capital to return the Bank to the required capital levels.

4) RECLASSIFICATION

In 2009, the Bank purchased from the FDIC, the FDIC’s portion of four loans in which the Bank was a participant and the lead bank had been placed in receivership. The face value of the former lead bank’s portion being offered by the FDIC amounted to $8,908,000. The Bank was the successful bidder for the balance of these four loans, purchasing them for a total price of $501,300, or a discount of $8,406,700. The face value of the Bank’s portion of the four loans totaled $10,394,000, which the Bank had written down by $6,437,000 to a carrying value of $3,454,700. In 2010, the Bank foreclosed on the underlying real estate on the four loans, having a fair market value, based on current appraisals, of $8,779,000. The Bank recorded the four parcels of foreclosed properties at $7,301,000, which represents a discount to their fair value to cover estimated selling and other disposal costs. The recording of these assets generated a fair value adjustment of $3,345,000 which was recorded as a foreclosure gain in the March 2010 financial statements.

10

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

4) RECLASSIFICATION, continued

Subsequently, during an examination of the Bank by the Supervisory Authorities during the current period, the above described transaction was reviewed. The Supervisory Authorities required the Bank to record the fair value adjustment of $3,345,000 as a recovery of a loan charge off rather than a foreclosure gain, resulting in a corresponding reduction to the provision for loan losses for the three months ended March 31, 2010. The reclassification of the $3,345,000 did not change the financial results at March 31, 2010 or the results of operation for the three months ending thereon. The reclassification is reflected in the accompanying financial statements for the six months ended June 30, 2010.

The reclassification affected the changes in the allowance for loan losses and the expense (income) on foreclosed properties as previously reported for the three months ended March 31, 2010 as reflected below.

	Change in Allowance for Loan Losses
(in thousands)	As Previously Reported			As Reclassified
Balance, beginning of period	$	13,324		$	13,324
Provision for (recovery of) loan losses		469			(2,876	)
Loans charged off		(131	)		(131	)
Recoveries of loans previously charged off		73			3,418
Balance, end of period	$	13,735		$	13,735
	Expenses (income) on Foreclosed Properties
	As Previously Reported			As Reclassified
Net loss on sale of other real estate	$	111		$	111
Fair value adjustment to foreclosed properties		(3,192	)		153
Operating expenses, net of rental income		164			164
	$	(2,917	)	$	428

11

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

5) ACCOUNTING STANDARDS UPDATES

In May 2010, the FASB issued Accounting Standards Update No. 2010-19, Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (“ASU No. 2010-19”). ASU No. 2010-19 codifies the SEC Staff Announcement on May 18, 2010, regarding the SEC’s view on certain foreign currency issues related to investments in Venezuela. This guidance was effective May 18, 2010 and is not applicable to the Company.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). ASU No. 2010-20 requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Existing disclosures were amended to require a rollforward of the allowance for loan losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans. Nonaccrual and impaired loans by class must also be shown. ASU No. 2010-20 also requires disclosures regarding: 1) credit quality indicators by class, 2) aging of past due loans by class, 3) troubled debt restructurings (“TDRs”) by class and their effect on the allowance for loan losses, 4) defaults on TDRs by class and their effect on the allowance for loan losses, and 5) significant purchases and sales of loans disaggregated by portfolio segment. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period type disclosures. Activity related disclosures are effective for interim and annual reporting periods beginning on or after December 15, 2010. ASU No. 2010-20 will have an impact on the Company’s disclosures, but not its financial position or results of operations.

12

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6) SECURITIES

The amortized cost and fair value of securities are summarized as follows:

Securities Available for Sale

			Gross		Gross			Estimated
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2010:
U.S. Government sponsored agencies	$	16,303	$	152	$	(1	)	$	16,454
State and municipal securities		13,393		139		(67	)		13,465
Mortgage-backed securities		25,717		523		(9	)		26,231
	$	55,413	$	814	$	(77	)	$	56,150
December 31, 2009:
U.S. Government sponsored agencies	$	29,581	$	216	$	(108	)	$	29,689
State and municipal securities		10,461		169		(85	)		10,545
Mortgage-backed securities		30,710		1,284		(51	)		31,943
	$	70,752	$	1,669	$	(244	)	$	72,177
Securities Held to Maturity
			Gross		Gross			Estimated
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2010
State and municipal securities	$	695	$	9	$	—		$	704
December 31, 2009:
State and municipal securities	$	695	$	11	$	(1	)	$	705

Restricted equity securities are summarized as follows:

(in thousands)	June 30, 2010		December 31, 2009
Federal Home Loan Bank stock	$	1,266	$	1,266

13

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6) SECURITIES, continued

Securities with a carrying value of $16,454,000 at June 30, 2010 and $21,170,000 at December 31, 2009 were pledged to secure public deposits and for other purposes required or permitted by law.

The following table summarizes securities sales activity and gains (losses) for the three and six month periods ended June 30, 2010 and 2009:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2010		2009		2010		2009
Proceeds from sales	$	3,113	$	—	$	23,440	$	—
Gross gains on sale		175		—		987		—
Impairment losses on restricted equity securities		—		—		—		(275	)
Net gains (losses)	$	175	$	—	$	987	$	(275	)

The amortized cost and fair value of debt securities as of June 30, 2010 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

	Securities Available for Sale				Securities Held to Maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	17,090	$	17,223	$	270	$	274
Due after one year through five years		5,493		5,613		425		430
Due after five years through ten years		5,527		5,505		—		—
After ten years		1,586		1,578		—		—
Mortgage-backed securities		25,717		26,231		—		—
	$	55,413	$	56,150	$	695	$	704

14

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6) SECURITIES, continued

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Information pertaining to securities with gross unrealized losses at June 30, 2010 and December 31, 2009 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

Securities Available for Sale

	Less Than 12 Months				12 Months or More
(in thousands)	Fair Value		Unrealized Losses		Fair     Value		Unrealized Losses
June 30, 2010
U. S. Government sponsored agencies	$	999	$	1	$	—	$	—
State and municipal securities		3,883		67		—		—
Mortgage-backed securities		1,080		9		—		—
Total temporarily impaired securities	$	5,962	$	77	$	—	$	—
December 31, 2009
U. S. Government sponsored agencies	$	5,888	$	108	$	—	$	—
State and municipal securities		2,923		85		—		—
Mortgage-backed securities		2,019		51		—		—
Total temporarily impaired securities	$	10,830	$	244	$	—	$	—

15

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6) SECURITIES, continued

Securities Held to Maturity

	Less Than 12 Months				12 Months or More
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2010
U. S. Government sponsored agencies	$	—	$	—	$	—	$	—
State and municipal securities		—		—		—		—
Mortgage-backed securities		—		—		—		—
Total temporarily impaired securities	$	—	$	—	$	—	$	—
December 31, 2009
U. S. Government sponsored agencies	$	—	$	—	$	—	$	—
State and municipal securities		—		—		249		1
Mortgage-backed securities		—		—		—		—
Total temporarily impaired securities	$	—	$	—	$	249	$	1

The unrealized losses on the Company’s investment in state and municipal securities are caused by changes in interest rates. The Company’s investments in state and municipal securities consist primarily of general obligations of municipalities located in the state of Georgia. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2010 and December 31, 2009.

The unrealized losses on the Company’s investment in both direct obligations of federal agencies and mortgage-backed securities guaranteed by federal agencies were also caused by changes in interest rates. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government, accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2010 and December 31, 2009.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

7) LOANS

The composition of loans is summarized as follows:

(in thousands)	June 30, 2010			December 31, 2009
Real estate-commercial
Owner occupied	$	162,479		$	170,410
Non-owner occupied		16,875			14,793
Real estate-construction		157,482			175,527
Real estate-1-4 family		51,746			54,332
Commercial		14,338			14,396
Consumer		5,310			5,468
		408,230			434,926
Deferred loan fees		(23	)		(35	)
Allowance for loan losses		(11,430	)		(13,324	)
Loans, net	$	396,777		$	421,567

Included in real estate construction loans above, at June 30, 2010 are $132,749,000 of interest only loans of which 91% have interest due on at least a semiannual basis and 9% have interest due at maturity.

Changes in the allowance for loan losses are as follows:

	Six months ended June 30,
(amounts in thousands)	2010			2009
Balance, beginning of period	$	13,324		$	17,730
Provision for (recovery of) loan losses		(696	)		13,940
Loans charged off		(4,618	)		(16,562	)
Recoveries of loans previously charged off		3,420			62
Balance, end of period	$	11,430		$	15,170

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

7) LOANS, continued

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include loans modified in troubled debt restructuring where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as nonperforming. At June 30, 2010, the Company had $64,126,000 in construction loans, $17,192,000 in commercial real estate loans and $749,000 in commercial loans that were modified in troubled debt restructuring and nonperforming. In addition to these amounts, the Company had troubled debt restructurings that were performing in accordance with their modified terms of $5,719,000 in residential mortgages, $18,469,000 in construction loans, $17,904,000 in commercial real estate loans and $2,014,000 in commercial loans at June 30, 2010.

Interest income recognized on impaired loans amounted to $716,000 and $206,000 for the six months ended June 30, 2010 and 2009, respectively. For the quarters ended June 30, 2010 and 2009, the amount of interest income recognized from cash payments totaled $669,000 and $68,000, respectively.

The following is a summary of information pertaining to impaired loans, nonaccrual loans, and loans past due ninety days or more.

(amounts in thousands)	June 30, 2010		December 31, 2009
Impaired loans without a valuation reserve	$	108,117	$	94,382
Impaired loans with a valuation reserve		28,834		20,334
Total impaired loans	$	136,951	$	114,716
Valuation allowance related to impaired loans	$	5,081	$	5,284
Nonaccrual loans		90,475		101,558
Loans past due ninety days or more and still accruing interest		1,960		471

The average investment in impaired loans for the six months ended June 30, 2010 and the twelve months ended December 31, 2009 approximated $120.3 million and $106.0 million, respectively.

No additional funds are committed to be advanced in connection with impaired loans.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8) FORECLOSED PROPERTIES

A summary of activity in foreclosed properties is as follows:

	Six Months Ended June 30,
(in thousands)	2010			2009
Balance, beginning of period	$	49,732			18,398
Loans transferred to foreclosed properties		20,732			16,125
Capitalized costs to properties		261			75
Cash sales proceeds		(1,522	)		(4,320	)
Financed sales		(676	)		(248	)
Loss on sale of properties		(152	)		(537	)
Impairment losses		(3,039	)		(1,456	)
Balance, end of period	$	65,336		$	28,037

Expenses (income) applicable to foreclosed properties include the following:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2010		2009		2010		2009
Net loss on sales of other real estate	$	41	$	116	$	152	$	537
Fair value adjustment to foreclosed properties		2,886		1,299		3,039		1,456
Operating expenses, net of rental income		1,374		210		1,538		532
	$	4,301	$	1,625	$	4,729	$	2,525

9) COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9) COMMITMENTS AND CONTINGENCIES, continued

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Company’s commitments is as follows:

(in thousands)	June 30, 2010		December 31, 2009
Standby letters of credit	$	2,625	$	2,671
Commitments to extend credit		22,900		36,236
	$	25,525	$	38,907

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

Contingencies

In the normal course of business, the Company is involved in various legal proceedings and actions to protect its interests in collateral supporting its loans. In the opinion of management, any liability or loss resulting from such proceedings or outcomes of such actions would not have a material adverse effect on the Company’s financial statements.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

10) CONCENTRATIONS OF CREDIT RISK

The Company originates primarily commercial, commercial real estate, residential real estate, and consumer loans to customers in Henry County and surrounding counties. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy in these areas.

Ninety-five percent of the Company’s loan portfolio is concentrated in loans secured by real estate, of which a substantial portion is secured by real estate in the Company’s primary market area. Additionally, forty percent of the Company’s loan portfolio is concentrated in real estate construction and land development loans. Accordingly, the ultimate collectability of the loan portfolio and recovery of other real estate owned are susceptible to changes in market conditions in the Company’s primary market area.

The Bank, as a matter of state law, does not generally extend additional credit to any single borrower or group of related borrowers in excess of 25% of statutory capital, or approximately $5,600,000. The State of Georgia recently enacted new legislation that has been signed into law by the governor which allows banks to renew existing debt that would exceed the statutory capital limit subject to certain limitations.

11) REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At June 30, 2010, no dividends could be declared without prior regulatory approval.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined.

As a result of examination findings in mid 2009 by the Georgia Department of Banking and Finance, (the “DBF”) and the Federal Deposit Insurance Corporation (the “FDIC”), (collectively, the “Supervisory Authorities”), the Bank’s Directors, on May 7, 2010, entered into a Stipulation and Consent Agreement with the Supervisory Authorities agreeing to the issuance of a Consent Order (the “Order”). Specifically, the Order requires: increased involvement by the Bank’s Board of Directors; an assessment of current and future

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11) REGULATORY MATTERS, continued

management and staffing needs; reductions in adversely classified assets; improvement in the overall quality and management of the loan portfolio; adequate allowance for loan losses; a Tier I leverage capital ratio of not less than 8% and a Total Risk Based capital ratio of not less than 10%; establishment of a plan to maintain adequate liquidity including a prohibition on accepting brokered deposits and a limitation on interest rates paid on all deposits; prior Supervisory Authority approval to pay cash dividends or Board of Director compensation; and adoption of an annual strategic plan and budget. The Order also establishes a framework and timeframes for the Bank reporting on its compliance with the provisions of the Order. Most of the provisions of the proposed Order are already being addressed by management, thus it is not contemplated that the Order will significantly change how the Bank is currently being operated. However, there can be no assurance that the Bank will be successful in meeting all of the requirements of the Order.

If the Bank fails to adequately address, or make substantial progress towards resolution of the regulatory concerns in the Order, the Supervisory Authorities may take further action including, but not limited to, additional requirements for maintaining sufficient capital under the Order. An ongoing failure to adequately address or make substantial progress towards addressing the concerns of the Supervisory Authorities could ultimately result in the eventual appointment of a receiver or conservator of the Bank’s assets.

The Supervisory Authorities examined the Bank during June and July 2010. Although the final report has not been issued, the Bank believes that the findings of the Supervisory Authorities are fully reflected in the accompanying financial statements.

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. At June 30, 2010, under the prompt corrective active framework, the Bank’s Tier 1 Risk Based Capital Ratio is considered adequately capitalized, the Tier 1 Leverage Ratio is considered undercapitalized and the Bank’s Total Risk Based Capital Ratio is considered significantly undercapitalized. Therefore as of June 30, 2010, the Bank is considered, under the prompt corrective action framework, significantly undercapitalized as the lowest ratio determines the regulatory category. Prompt corrective action provisions are not applicable to bank holding companies.

	Consolidated		Bank		Well Capitalized Regulatory Requirement
Leverage Capital Ratios	3.48	%	3.45	%	5.00	%
Risk Based Capital Ratios:
Tier 1	4.19	%	4.16	%	6.00	%
Total	5.45	%	5.41	%	10.00	%

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

Level 2 Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash, Interest-Bearing Deposits in Banks, Excess Federal Reserve Balances and Federal Funds Sold: The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities: Where quoted prices are available in an active market, the securities are classified within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include obligations of Government Sponsored Entities (“GSE”), corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, those securities are classified in Level 3.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securities securitization transactions, adjusted for differences in loan characteristics. Fair value for other loans (for example, commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities: The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Off-balance Sheet Credit-Related Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

Assets and Liabilities Measured at Fair Value on a Recurring Basis: Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at June 30, 2010 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value
Assets
Securities available for sale	$	6,183	$	49,967	$	—	$	56,150
Total assets at fair value	$	6,183	$	49,967	$	—	$	56,150
	Fair Value Measurements at December 31, 2009 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value
Assets
Securities available for sale	$	1,211	$	70,966	$	—	$	72,177
Loans held for sale		—		499		—		499
Total assets at fair value	$	1,211	$	71,465	$	—	$	72,676

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

Assets Measured at Fair Value on a Nonrecurring Basis: Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the nonrecurring fair value changes made to financial instruments carried on the consolidated balance sheet by caption.

	For the Six Months Ended June 30, 2010 2010 Fair Value Changes Based On:
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
Impaired loans	$	—	$	1,023	$	1,015	$	2,038
Foreclosed assets		—		422		2,617		3,039
Total	$	—	$	1,445	$	3,632	$	5,077
	For the Three Months Ended June 30, 2010 2010 Fair Value Changes Based On:
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
Impaired loans	$	—	$	898	$	860	$	1,758
Foreclosed assets		—		413		2,473		2,886
Total	$	—	$	1,311	$	3,333	$	4,644

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

In accordance with the provisions of the loan impairment guidance (FASB ASC 310-10-35), individual loans and foreclosed properties with Level 2 carrying amounts of $36,829,000 and $20,234,000, respectively, were written down to their fair values of $35,806,000 and $19,812,000, resulting in impairment charges to earnings in 2010 of $1,023,000 and $422,000, respectively. Individual loans and foreclosed properties with Level 3 carrying amounts of $56,799,000 and $48,259,000, respectively, were written down to their fair values of $55,784,000 and $45,642,000, resulting in impairment charges to earnings in 2010 of $1,015,000 and $2,617,000, respectively. Fair values for impaired loans are estimated using the present value of expected cash flows discounted at the loan’s effective interest rate or the appraised value of the underlying collateral discounted as necessary due to management’s estimates of changes in economic conditions. When the fair value of the impaired loan is determined using collateral with an observable market price or a current appraised value, the Company records the loan impairment as nonrecurring Level 2. When an appraised value is not available and there is no determinable market price, the Company records the loan impairment as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value, less estimated disposal costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed assets as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12) FAIR VALUE OF ASSETS AND LIABILITIES, continued

The carrying amount and estimated fair value of the Company’s financial instruments were as follows:

	June 30, 2010				December 31, 2009
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash, interest-bearing deposits in banks, excess Federal Reserve balances and federal funds sold	$	47,233	$	47,233	$	38,222	$	38,222
Securities available for sale		56,150		56,150		72,177		72,177
Securities held to maturity		695		704		695		705
Restricted equity securities		1,266		1,266		1,266		1,266
Loans held for sale		—		—		499		499
Loans, net		396,777		396,276		421,567		425,531
Accrued interest receivable		1,842		1,842		2,222		2,222
Financial liabilities:
Deposits	$	554,283	$	559,891	$	586,101	$	595,438
Other borrowings		708		708		1,436		1,478
Accrued interest payable		1,591		1,591		2,116		2,116

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

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 subsidiary, The First State Bank (the “Bank”), during the periods included in the accompanying consolidated financial statements.

Cautionary Notice Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about the Company and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results of the Company could be quite different from those expressed or implied by the forward-looking statements. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “could”, “may”, “will”, “should”, “plan”, “believes”, “anticipates”, “estimates”, “pro forma”, “seeks”, “intends”, “predicts”, “expects”, “projections”, “potential”, “continue”, or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of the Company and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, as well as the following factors:

• our ability to meet the conditions outlined in the Consent Order (further described in Item 5. Other Information in this report on form 10-Q) including our ability to raise capital consistent with our capital plan;

• difficult market conditions and economic trends;

• our concentrations of residential and commercial construction and development loans;

• continued deterioration in the metro Atlanta real estate markets;

• our allowance for loan losses may not be sufficient to cover actual loan losses that could be incurred;

• increased carrying costs and the probability of additional impairment charges associated with our foreclosed properties

• extended holding periods that may be required before we can liquidate our foreclosed properties

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

• our ability to maintain liquidity or access other sources of funding;

• changes in the cost and availability of funding;

• changes in prevailing interest rates that may negatively affect our net income and the value of our assets;

• changes in financial services laws and regulations;

• competition from financial institutions and other financial service providers;

• ability to retain key personnel;

• increasing FDIC Insurance premiums brought on by systemic industry deterioration in conjunction with a higher risk rating assigned to our Bank;

• a special assessment that may be imposed by the FDIC on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings;

• recently enacted financial regulations could have a negative impact on noninterest income of the Company;

This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business.

Overview

The following discussion is intended to provide insight into the financial condition and results of operations of the Company and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

Henry County Bancshares, Inc. (“we” or “us” or the “Company”), headquartered in Stockbridge, Georgia, is a Georgia business corporation which operates as a bank holding company. The Company was incorporated on June 22, 1982 for the purpose of reorganizing The First State Bank (the “Bank”) to operate within a holding company structure. The Bank is a wholly owned subsidiary of the Company.

The Company’s principal activities consist of owning and supervising the Bank, which engages in a full service commercial and consumer banking business, as well as a variety of deposit services provided to its customers. The Company has also conducted mortgage lending operations through the Bank’s wholly owned subsidiary, First Metro Mortgage Company (“First Metro”), which provided the Bank’s customers with a wide range of mortgage banking services and products. Until December 15, 2009 when it suspended operations, First Metro, also located in Stockbridge, provided mortgage loan origination services in the same primary market area as the Bank. The Bank intends on keeping the licensing in place for First Metro and possibly resuming mortgage operations in the future.

At June 30, 2010, we had total assets of $580 million, total loans of $408 million, total deposits of $554 million, and stockholders’ equity of $21 million.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

For the first six months of 2010, we incurred a loss of $1.4 million compared to a loss of $18.7 million for the same period in 2009. During the second quarter of 2010 we incurred a loss of $5.5 million compared to a loss of $16.4 million in the second quarter of 2009. Our losses for the second quarter and for the first six months resulted from increased impairment charges and carrying costs on foreclosed properties and further write downs on nonperforming loans secured by real estate as a result of continued economic stagnation in the real estate markets in which we operate. As a result of the increase in nonperforming (nonearning) assets, interest income continues to correspondingly decline. In addition to the costs, charges, and interest income reduction associated with our nonperforming assets, we also experienced a significant increase in recurring FDIC Insurance Premiums for the first six months of 2010 when compared to the same period in 2009. FDIC Insurance premiums for 2009 reflect the one-time special FDIC assessment. The increased cost of recurring FDIC Insurance was the result of premium increases plus additional premiums based on the risk profile of the Bank.

The Company’s nonperforming assets reflect the impact of slowed economic activity, depressed real estate values, reduced sales and a challenging banking environment. Total nonperforming assets at June 30, 2010 were $157.8 million compared to $151.8 million at December 31, 2009. The increase in nonperforming assets during the first six months of 2010 reflects the addition of new loans that were previously performing, plus our inability, due to market conditions, to sell meaningful amounts of foreclosed properties to offset nonperforming loans which moved to foreclosed properties during the first six months. Net charge-offs for the first six months amounted to $1.2 million compared to $16.5 million for the same period in 2009. Gross charges-offs for the six months ending June 30, 2010 totaled $4.6 million, but were mostly offset by a recovery of $3.3 million. At December 31, 2009, our allowance for loan losses was $13.3 million or 3.06% of loans compared to $11.4 million or 2.80% at June 30, 2010.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2009 as filed in our annual report on Form 10-K. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Results of Operations

For the first six months of 2010, we incurred a loss of $1.4 million compared to a loss of $18.7 million for the same period in 2009. During the second quarter of 2010 we incurred a loss of $5.5 million compared to a loss of $16.4 million in the second quarter of 2009. Our losses for the second quarter and for the first six months resulted from increased impairment charges and carrying costs on foreclosed properties and further write downs on nonperforming loans secured by real estate as a result of continued economic stagnation in the real estate markets in which we operate. As a result of the increase in nonperforming (nonearning) assets, interest income continues to correspondingly decline. During the first six months of 2010, we also experienced a significant increase in recurring FDIC Insurance Premiums when compared to the same period in 2009. The impact on earnings from the above mentioned items has been partially offset by a reduction in controllable operating expenses, increases in other income, and nonrecurring other income gains.

Net cash provided by operating activities (“operating cash flow”), which reflects net earnings or loss exclusive of noncash items, totaled $18.5 million for the first six months of 2010. Included in our operating cash flow for the periods ended June 30, 2010 and 2009 is the receipt of tax refunds in the amount of $16.9 million and $6.1 million, respectively. Not including refunds, our operating cash flow amounted to $1.6 million for the first six months of 2010 compared to a cash outflow of $1.1 million for the same period in 2009. Operating cash flow is a significant liquidity measure that is critical to a bank’s operations and continued viability.

Our provision for loan losses amounted to $2.2 million for the three months ended June 30, 2010, compared to a provision of $12.3 million for the same period in 2009. For the six month period ended June 30, 2010, we reduced our allowance for loan losses through a negative provision of $696,000. The negative provision results from a recovery of $3.3 million relating to a positive fair value adjustment upon foreclosure of certain collateral. For the first six months of 2009, we added $14.0 million to our allowance for loan losses through the provision. In addition to providing for loan losses, we also continue to have fair value adjustments and losses on the sale of foreclosed properties. For the six months ended June 30, 2010, we had impairment charges of $3.0 million plus losses on the sale of foreclosed properties in the amount of $152,000 compared to $1.5 million in impairment charges and $537,000 in losses for the same period in 2009.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Table 1-Financial Highlights

Selected Financial Information

	For the three months ended															For the six months ended
(in thousands, except per share and other data)	June  30, 2010			March 31, 2010			December 31, 2009			September 30, 2009			June  30, 2009			June 30,
																2010			2009
SUMMARY OF OPERATIONS
Interest income	$	5,237		$	5,682		$	5,009		$	5,796		$	3,946		$	10,919		$	10,543
Interest expense		2,484			2,860			3,357			3,741			3,805			5,344			7,655
Net interest income		2,753			2,822			1,652			2,055			141			5,575			2,888
Provision for loan losses		2,180			(2,876	)		24,850			378			12,340			(696	)		13,940
Other operating income		952			1,469			724			832			763			2,420			1,092
Other expenses		7,070			2,998			5,516			3,552			4,915			10,067			8,768
Earnings (loss) before income taxes		(5,545	)		4,169			(27,990	)		(1,043	)		(16,351	)		(1,376	)		(18,728	)
Income tax expense (benefit)		—			—			(11,109	)		—			—			—			—
Net earnings (losses)	$	(5,545	)	$	4,169		$	(16,881	)	$	(1,043	)	$	(16,351	)	$	(1,376	)	$	(18,728	)
Weighted average shares		14,245,690			14,245,690			14,245,690			14,245,690			14,245,690			14,245,690			14,245,690
PERFORMANCE MEASURES
Per common share:
Earnings (loss) per share	$	(0.39	)	$	0.29		$	(1.18	)	$	(0.07	)	$	(1.15	)	$	(0.10	)	$	(1.31	)
Cash dividends per share		—			—			—			—			—			—			—
Profitability ratios:
Return on average equity		-82.56	%		63.53	%		-214.00	%		-10.41	%		-113.67	%		-10.36	%		-60.80	%
Return on average assets		-3.77	%		2.75	%		-10.66	%		-0.63	%		-9.71	%		-0.46	%		-5.55	%
Net interest margin		2.20	%		2.18	%		1.19	%		1.35	%		0.12	%		2.18	%		0.92	%
Efficiency ratio		190.82	%		69.87	%		232.15	%		123.03	%		543.69	%		125.92	%		220.30	%
Loan Quality Indicators
Net charge-offs (recoveries)		4,485			(3,287	)		26,096			978			15,166			1,198			15,166
Net charge-offs to average loans		1.08	%		-0.76	%		5.52	%		0.20	%		2.90	%		0.28	%		2.91	%
AVERAGE BALANCES
Loans	$	416,877		$	431,729		$	472,626		$	495,245		$	522,471		$	424,267		$	527,801
Investment securities		51,751			57,810			72,815			72,800			71,131			54,761			68,724
Earning assets		507,255			523,121			554,631			610,710			633,951			515,165			631,419
Total assets		589,063			606,236			633,543			663,058			673,628			597,592			674,739
Deposits		558,710			575,076			597,216			617,906			611,534			566,839			608,130
Stockholders’ equity		26,864			26,247			31,553			40,094			57,536			26,557			61,610
AT PERIOD END
Loans	$	408,207		$	418,384		$	434,891		$	482,784		$	496,473
Investment securities		56,845			53,565			72,872			72,757			72,843
Total assets		580,294			600,269			614,648			652,438			673,678
Deposits		554,283			569,457			586,101			608,331			627,481
Stockholders’ equity		21,263			26,619			23,327			39,779			40,409
Common shares outstanding		14,245,690			14,245,690			14,245,690			14,245,690			14,245,690
Book value	$	1.49		$	1.87		$	1.64		$	2.79		$	2.84
Liquidity ratios:
Total loans to total deposits		73.65	%		73.47	%		74.20	%		79.36	%		79.12	%
Average loans to average earning assets		82.18	%		82.53	%		85.21	%		81.09	%		82.42	%
Noninterest-bearing deposits to total deposits		12.34	%		12.59	%		10.21	%		11.14	%		10.89	%
Capital ratios:
Leverage		3.48	%		4.30	%		3.38	%		5.79	%		5.92	%
Risk-based capital
Tier 1		4.19	%		5.15	%		4.30	%		7.42	%		7.40	%
Total		5.45	%		6.42	%		5.55	%		8.69	%		8.67	%

34

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Net Interest Income

Our results of operations are determined by our ability to manage interest income and expense effectively, to minimize loan and investment losses, to generate non-interest income, and to control operating expenses. Because interest rates are determined by market forces and economic conditions beyond our control, our ability to generate net interest income depends on our ability to obtain an adequate net interest spread between the rate we pay on interest-bearing liabilities and the rate we earn on interest-earning assets.

The average yield on interest earning assets increased and the average cost of interest bearing liabilities declined for both the second quarter of 2010 and for the six months ended June 30, 2010 compared to the same periods for 2009 resulting in increases in the net interest margin for the periods. The net interest margin for the six months ended June 30, 2010 and the quarter ending thereon was 2.18% and 2.20%, respectively compared to .92% and .12% for the same periods in 2009. For the first six months of 2010, the yield on average interest earning assets was 4.27%, an increase from 3.37% for the same period in 2009. For the quarters ending June 30, 2010 and 2009, the yield on average earning assets totaled 4.19% and 2.55%, respectively.

The impact of non recurring interest adjustments from loans placed on nonaccrual status and the collection of interest on nonaccrual loans impacted the yields in both periods. During the first six months of 2010 some customers cured defaults that brought their loans current. These amounts were partially offset by interest reversed on loans placed on nonaccrual. In addition, an unrecorded 2009 advance on a line of credit for payment of interest was collected through foreclosure in 2010. The following chart shows the impact of these non recurring interest adjustments on the yield on earning assets and the net interest margin for the three and six month periods ended June 30, 2010 and 2009.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

	For the six months ended June 30,
	2010							2009
(in thousands)	Average Balance		Interest			Average Rate		Average Balance		Interest		Average Rate
Amounts reflected in financial statements	$	515,165	$	10,919		4.27	%	$	631,419	$	10,543	3.37	%
Effect of non accrual interest (collected) reversed				(432	)						3,300
Effect of interest advance (collected) reversed				(521	)						1,500
Total adjustments				(953	)						4,800
Amounts excluding the effect of nonaccrual interest income/reversals	$	515,165	$	9,966		3.90	%	$	631,419	$	15,343	4.90	%
Adjusted net interest revenue			$	4,622						$	7,688
Adjusted net interest margin						1.81	%					2.46	%
	For the three months ended June 30,
	2010							2009
(in thousands)	Average Balance		Interest			Average Rate		Average Balance		Interest		Average Rate
Amounts reflected in financial statements	$	507,255	$	5,237		4.19	%	$	633,951	$	3,986	2.55	%
Effect of non accrual interest reversed				125							2,769
Effect of interest advance (collected) reversed				(521	)						1,500
Total adjustments				(396	)						4,269
Amounts excluding the effect of nonaccrual interest income/reversals	$	507,255	$	4,841		3.87	%	$	633,951	$	8,255	5.28	%
Adjusted net interest revenue			$	2,357						$	4,451

Absent these non recurring items, the yield on earning assets for the first six months of 2010 and 2009 would have been 3.90% and 4.90% respectively. The decrease in the adjusted yield on average interest earning assets is primarily the result of the increase in nonperforming assets. Average nonperforming assets (nonaccrual loans and foreclosed properties) for the six month periods ending June 30, 2010 and 2009 were $149.2 million (24.8% of average assets) and $94.6 million (14.09% of average assets), respectively. In addition, the overall decline in interest rates has translated into a decrease in fixed rates on new and renewed loans in during the first six months of 2010. The cost of interest bearing liabilities for the three and six month periods ended June 30, 2010 were 2.05% and 2.15%, respectively, compared to 2.83% and 2.84% for the same periods in 2009. The decline in the cost of interest bearing liabilities is reflective of the overall decline in interest rates and the decline in funding needs of the Bank due to decreased loan demand. The decline in funding needs has allowed the Bank to not renew higher cost, non customer related deposits, which has helped reduce the overall cost of interest bearing liabilities and reduce the overall balance sheet.

Net interest income totaled $2.2 million and $5.1 million for the three and six month periods ended June 30, 2010 compared to $182,000 and $2.9 million for the same periods in 2009. Net interest income for the first six months of 2010 and 2009, adjusted for non recurring interest income items, totaled $4.6 million and $7.7 million, representing an adjusted margin for the two periods of 1.81% and 2.46% respectively.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Table 2-Average Consolidated Balance Sheet and Net Interest Margin Analysis

For the three months ended June 30, 2010 and 2009

	2010							2009
(in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets:
Interest-earning assets:
Loans (1)	$	416,877		$	4,706	4.58	%	$	522,471		$	3,313	2.57	%
Taxable securities (2)(3)		46,891			453	3.92	%		65,940			594	3.65	%
Tax-exempt securities (2)(4)		4,860			43	3.59	%		5,191			68	5.31	%
Overnight investments and other interest-earning assets		38,627			35	0.37	%		40,349			11	0.11	%
Total interest-earning assets		507,255			5,237	4.19	%		633,951			3,986	2.55	%
Non-interest-earning assets:
Allowance for loan losses		(13,759	)						(17,793	)
Cash and due from banks		10,831							12,627
Other assets		84,736							44,843
Total assets	$	589,063						$	673,628
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	57,997		$	71	0.50	%	$	60,919		$	75	0.50	%
Money market		37,537			59	0.63	%		40,701			63	0.63	%
Savings		32,684			41	0.51	%		31,545			48	0.62	%
Time deposits less than $100,000		199,981			1,206	2.45	%		219,616			1,957	3.61	%
Time deposits greater than $100,000		120,026			793	2.68	%		135,514			1,257	3.76	%
Brokered deposits		41,442			311	3.05	%		54,652			390	2.89	%
Total interest-bearing deposits		489,667			2,481	2.05	%		542,947			3,790	2.83	%
Other borrowings		562			3	2.17	%		1,926			14	2.88	%
Total interest-bearing liabilities		490,229			2,484	2.06	%		544,873			3,804	2.83	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		69,043							68,587
Other liabilities		2,927							2,632
Total liabilities		562,199							616,092
Stockholders’ equity		26,864							57,536
Total liabilities and stockholders’ equity	$	589,063						$	673,628
Net interest revenue				$	2,753						$	182
Net interest-rate spread						2.13	%						-0.28	%
Net interest margin (5)						2.20	%						0.12	%

(1) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.

(2) Securities available for sale are shown at amortized cost. Average pretax unrealized gains of $792,000 for the three months ended June 30, 2010 and $575,000 for the three months ended June 30, 2009 are included in other assets.

(3) Includes restricted equity securities

(4) Interest income on tax-exempt securities is not stated on a tax equivalent basis.

(5) Net interest margin is not stated on a tax-equivalent basis.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Table 3-Average Consolidated Balance Sheet and Net Interest Margin Analysis

For the six months ended June 30, 2010 and 2009

	2010							2009
(in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets:
Interest-earning assets:
Loans (1)	$	424,267		$	9,828	4.67	%	$	527,801		$	9,193	3.51	%
Taxable securities (2)(3)		49,899			944	3.82	%		63,304			1,193	3.80	%
Tax-exempt securities (2)(4)		4,862			91	3.76	%		5,420			133	4.95	%
Overnight investments and other interest-earning assets		36,137			56	0.31	%		34,894			24	0.14	%
Total interest-earning assets		515,165			10,919	4.27	%		631,419			10,543	3.37	%
Non-interest-earning assets:
Allowance for loan losses		(15,555	)						(13,967	)
Cash and due from banks		11,127							12,845
Other assets		86,855							44,442
Total assets	$	597,592						$	674,739
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	57,439		$	140	0.49	%	$	59,338		$	145	0.49	%
Money market		37,029			113	0.61	%		43,092			142	0.66	%
Savings		32,479			80	0.50	%		30,981			104	0.67	%
Time deposits less than $100,000		203,590			2,615	2.59	%		217,265			3,901	3.62	%
Time deposits greater than $100,000		122,092			1,696	2.80	%		135,496			2,528	3.76	%
Brokered deposits		47,077			686	2.94	%		54,677			807	2.98	%
Total interest-bearing deposits		499,706			5,330	2.15	%		540,849			7,627	2.84	%
Other borrowings		1,011			14	2.79	%		2,030			28	2.77	%
Total interest-bearing liabilities		500,717			5,344	2.15	%		542,879			7,655	2.84	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		67,133							67,281
Other liabilities		3,185							2,969
Total liabilities		571,035							613,129
Stockholders’ equity		26,557							61,610
Total liabilities and stockholders’ equity	$	597,592						$	674,739
Net interest revenue				$	5,575						$	2,888
Net interest-rate spread						2.12	%						0.53	%
Net interest margin (5)						2.18	%						0.92	%

(1) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.

(2) Securities available for sale are shown at amortized cost. Average pretax unrealized gains of $800,000 for the six months ended June 30, 2010 and $686,000 for the six months ended June 30, 2009 are included in other assets.

(3) Includes restricted equity securities

(4) Interest income on tax-exempt securities is not stated on a tax equivalent basis.

(5) Net interest margin is not stated on a tax-equivalent basis.

38

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Table 4- Changes in Interest Income and Interest Expense

	Three Months Ended June 30,  2010 Compared to 2009 Increase (decrease) Due to Changes in									Six Months Ended June 30, 2010 Compared to 2009 Increase (decrease) Due to Changes in
(in thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans	$	(777	)	$	2,170		$	1,393		$	(2,025	)	$	2,660		$	635
Taxable securities		(182	)		41			(141	)		(254	)		5			(249	)
Tax-exempt securities		(4	)		(21	)		(25	)		(13	)		(29	)		(42	)
Overnight investments and other interest-earning assets		—			24			24			1			31			32
Total interest-earning assets		(963	)		2,214			1,251			(2,291	)		2,667			376
Interest-bearing liabilities:
Interest-bearing deposits:
NOW		(4	)		—			(4	)		(5	)		—			(5	)
Money market		(4	)		—			(4	)		(19	)		(10	)		(29	)
Savings		2			(9	)		(7	)		4			(28	)		(24	)
Time deposits less than $100,000		(163	)		(588	)		(751	)		(233	)		(1,053	)		(1,286	)
Time deposits greater than $100,000		(132	)		(332	)		(464	)		(232	)		(600	)		(832	)
Brokered deposits		(98	)		19			(79	)		(111	)		(10	)		(121	)
Total interest-bearing deposits		(399	)		(910	)		(1,309	)		(596	)		(1,701	)		(2,297	)
Other borrowings		(8	)		(3	)		(11	)		(14	)		—			(14	)
Total interest-bearing liabilities		(407	)		(913	)		(1,320	)		(610	)		(1,701	)		(2,311	)
Increase (decrease) in net interest revenue	$	(556	)	$	3,127		$	2,571		$	(1,681	)	$	4,368		$	2,687

Provision for (Recovery of) Loan Losses

Our provision for loan losses amounted to $2.2 million for the three months ended June 30, 2010, compared to a provision of $12.3 million for the same period in 2009. For the six month period ended June 30, 2010, we reduced our allowance for loan losses through a negative provision of $696,000. The negative provision results from a recovery of $3.3 million relating to a positive fair value adjustment upon foreclosure of certain collateral. For the first six months of 2009, we added $14.0 million to our allowance for loan losses through the provision. The allowance for loan losses as a percentage of total loans was 2.80% at June 30, 2010 as compared to 3.06% at December 31, 2009. 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.

39

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Other Operating Income

Other income, not including securities gains or losses, was $777,000 and $1.4 million for the three and six month periods ending June 30, 2010 compared to $731,000 and $1.4 million for the same periods in 2009. For the second quarter, service charges on deposit accounts increased by $112,000 or 31.9% over the same period in 2009 and for the six month period, service charges increased by $247,000 or 37.5% over the first six months of 2009. The increase in service charge income is primarily attributable to an increase in insufficient funds charges resulting from the introduction of a courtesy overdraft privilege program during the second quarter of 2009. Securities gains totaled $987,000 for the first six months of 2010, compared to a loss of $275,000 for the first six months of 2009. Securities gains for the second quarter of 2010 were $175,000. There were no securities gains in the second quarter of 2009. Mortgage banking income, reflecting our decision to exit that business in December, declined from $158,000 and $254,000 for the quarter and six months ended June 30, 2009 to $13,000 for the first six months of 2010. There was no mortgage banking income during the second quarter 2010. The revenue recognized during 2010 reflects the amounts attributed to the sale of the mortgage loans in the pipeline when we suspended our mortgage operations.

Other Expenses

Expense control initiatives were responsible for declines in other expenses, not including net foreclosed properties expenses, for the quarter and six months ended June 30, 2010. For the three and six month periods ended June 30, 2010, other expenses declined $530,000 or 16.06% and $905,000 or 14.5%, respectively, compared to the same periods in 2009. Salaries and employee benefits declined by $430,000 and $790,000, and occupancy and equipment expenses declined by $29,000 and $127,000 for the quarter and six months ended June 30, 2010 compared to the same periods in 2009. The reduction in salaries and employee benefits is attributable to planned reduction in staffing levels, attrition and an across the board reduction in salaries for all officers and employees in the fourth quarter of 2009. For the quarter and six months ended June 30, 2010, other operating expenses decreased by $49,000 and $192,000, respectively. The cost savings generated in controllable expenses were partially offset by increased FDIC Insurance. Not considering the onetime special assessment of $317,000 incurred in the second quarter of 2009, FDIC and regulatory fees increased by $295,000 or 202.8% for the second quarter of 2010 compared to 2009, and by $521,000 or 216.3% for the first six months of 2010 compared to the same period in 2009.

Foreclosed properties expenses, net totaled $4.3 million for the second quarter of 2010 compared to $1.6 million for the second quarter of 2009 and $4.7 million compared to $2.5 million for the six month periods ended June 30, 2010 and 2009, respectively. Foreclosed properties expenses for 2010 included a $1.1 million accrual for property taxes. For the three month period ended June 30, 2010 and 2009, losses on the sale of foreclosed properties were $41,000 and $116,000, Net losses on the sale of foreclosed properties approximated $41,000 for the three months ended June 30, 2010 compared to $116,000 for the same period in 2009. For the six month period ended June 30, 2010 and 2009, losses on the sale of foreclosed properties totaled $152,000 and $537,000, respectively.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Income Taxes

There was no income tax expense or (benefit) recognized for the periods ended June 30, 2010 or 2009.

Additional information regarding income taxes can be found in Note 10 to the consolidated financial statements filed in our 2009 Annual Report on Form 10-K.

Balance Sheet Review

Total assets at June 30, 2010 and December 31, 2009 were $580.3 million, and $614.6 million, respectively. Average total assets for the first six months of 2010 were $597.6 million, down $77.1 million or 11.4% from $674.7 million for the first six months of 2009. For the quarters ended June 30, 2010 and 2009, average total assets were $589.1 million and $673.6 million respectively, a decline of $84.6 million or 12.6%.

Loans

The following table presents a composition of the Company’s loan portfolio.

Table 5- Loans Outstanding

(in thousands)	June 30, 2010			December 31, 2009
Real estate-commercial
Owner occupied	$	162,479		$	170,410
Non-owner occupied		16,875			14,793
Real estate-construction		157,482			175,527
Real estate-1-4 family		51,746			54,332
Commercial		14,338			14,396
Consumer		5,310			5,468
		408,230			434,926
Deferred loan fees		(23	)		(35	)
Allowance for loan losses		(11,430	)		(13,324	)
Loans, net	$	396,777		$	421,567

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

At June 30, 2010, total loans were $396.8 million, a decline of $24.8 million or a decline of 5.9% from December 31, 2009. The decline in loans is the result of problem loans transitioning to foreclosed properties and stagnant growth, both due to the economic deterioration in the Henry County market due to depressed housing sales and real estate values as well as significant local job losses due to reductions in construction and land development activity.

Asset Quality and Risk Elements

We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures. Additional information on the credit administration function is included in Item 1 under the headings Lending Policy and Loan Review and Non-performing Assets in our 2009 Annual Report on Form 10-K.

We classify performing loans as substandard loans when there is a well defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected. Substandard loans are classified as non-accrual substandard loans (or “non-performing loans”) when the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified as non-accrual, interest previously accrued but not collected is reversed against current interest revenue.

Reviews of substandard performing and non-performing loans, past due loans and larger credits, are conducted on a regular basis during the quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the chief credit officer and consider such factors as the financial strength of the borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. We also use an independent external loan review firm to validate the process described above.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

The following table presents a summary of the changes in the allowance for loan losses for the six months ended June 30, 2010 and 2009.

Table 6- Allowance for Loan Losses

	Six months ended June 30,
(in thousands)	2010			2009
Allowance at beginning of the period	$	13,324		$	17,730
Loans charged off:
Real estate		(4,552	)		(16,544	)
Commercial		(28	)		(18	)
Consumer		(38	)		—
		(4,618	)		(16,562	)
Recoveries:
Real estate		3,406			51
Commercial		—			—
Consumer		14			11
		3,420			62
Net (charge-offs)		(1,198	)		(16,500	)
(Recovery of) provision for loan losses		(696	)		13,940
Balance at end of the period	$	11,430		$	15,170
Total loans:
At period end	$	408,207		$	496,473
Average		424,267			527,801
Allowance as percentage of period end loans		2.80	%		3.06	%
As a percentage of average loans:
Net charge-offs		0.28	%		3.13	%
Provision for (recovery of) loan losses		-0.16	%		2.64	%

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance for loan losses at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. The decrease in the provision and the allowance for loan losses compared to a year ago were due to our aggressive recognition and partial charge-off of loans deemed impaired and the stabilization of the values of underlying collateral on impaired loans which has resulted in lower impairment charges. In addition, the decline in the loan portfolio has offset the higher default rate, which is one of the primary factors used in determining the allowance for loan losses.

Management believes that the allowance for loan losses at June 30, 2010 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section in our 2009 Annual Report on Form 10-K for additional information on the allowance for loan losses.

Nonperforming Assets

Our bank is located in what has historically been one of the fastest growing areas of the United States, south Metro Atlanta. A large number of our loans were to developers and contractors to purchase land, develop subdivisions and build houses to meet the growing population. The slowing economy has impacted many of our customers, causing stress in our portfolio, and increasing our nonperforming assets, which include nonperforming loans and foreclosed properties. Total nonperforming assets amounted to $157.8 million and $151.8 million at June 30, 2010 and December 31, 2009, respectively. The following table summarizes our nonperforming assets by type.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Table 7- Nonperforming Assets

(in thousands)	June 30, 2010			December 31, 2009
Nonaccrual loans (NPLs)	$	90,475		$	101,558
Loans past due 90 days or more and still accruing		1,960			471
Total nonperforming loans	$	92,435		$	102,029
Foreclosed properties		65,336			49,732
Total nonperforming assets (NPAs)	$	157,771		$	151,761
NPLs as a percentage of total loans		22.64	%		23.46	%
NPAs as a percentage of loans and foreclosed properties		33.32	%		31.32	%
NPAs as a percentage of total assets		27.19	%		24.69	%

In addition to these amounts, the Company had troubled debt restructurings that were performing in accordance with their modified terms of $5.7 million in residential mortgages, $18.5 million in construction loans, $17.9 million in commercial real estate loans and $2.0 million in commercial loans at June 30, 2010.

Nonperforming loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $92.4 million or 22.1% of total loans at June 30, 2010, compared with $102.0 million or 23.5% at December 31, 2009.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

The following table summarizes nonperforming assets by category.

Table 8- Nonperforming Assets (“NPAs”) by Category

(dollars in thousands)

	June 30, 2010						December 31, 2009
Loan type	Non- Performing Loans		Foreclosed Properties		Total		Non- Performing Loans		Foreclosed Properties		Total
Real estate-commercial
Owner occupied	$	9,430	$	—	$	9,430	$	9,917	$	—	$	9,917
Non-owner occupied	$	5,547		5,614		11,161		5,169		4,612		9,781
Total real estate-commercial		14,977		5,614		20,591		15,086		4,612		19,698
Real estate construction and development		73,123		48,020		121,143		79,514		32,931		112,445
Real estate 1-4 family		3,296		11,702		14,998		6,369		12,189		18,558
Total real estate loans		91,396		65,336		156,732		100,969		49,732		150,701
Commercial loans		989		—		989		1,014		—		1,014
Consumer loans		50		—		50		46		—		46
Total commercial and consumer loans		1,039		—		1,039		1,060		—		1,060
Total NPA’s	$	92,435	$	65,336	$	157,771	$	102,029	$	49,732	$	151,761

The following tables summarize the composition of our foreclosed properties at June 30, 2010.

Table 9-Composition of Foreclosed Properties

As of June 30, 2010

(dollars in thousands)	Balance		Percent*
Developments	$	14,582	22.32
Raw Land		21,198	32.45
Houses		11,702	17.91
Lots		12,240	18.73
Commercial Real Estate		5,614	8.59
Total	$	65,336	100.00

* Percent of total foreclosed properties

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less estimated costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. For the six months ended June 30, 2010 and 2009, the Bank transferred $20.9 million and $16.1 million, respectively, of loans into foreclosed property. During the same periods, proceeds from cash sales of foreclosed properties were $1.5 million and $4.3 million, respectively. For the quarters ended June 30, 2010 and 2009, the Bank transferred $13.0 million and $1.6 million, respectively, of loans into foreclosed properties and had cash sales of $1.4 million and $2.2 million, respectively.

Investment Securities

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Securities available for sale at June 30, 2010 decreased $16.0 million from December 31, 2009. The decrease reflects the liquidation of a portion of our securities portfolio in order to capture unrealized gains and reposition the portfolio to maximize return in this protracted low interest rate environment.

Deposits

Total average deposits for the three and six month periods ended June 30, 2010 were $558.7 million and $566.8 million, respectively. Although deposits were down in all categories, the majority of the decline was centered in money market accounts and time deposits as we lowered our deposit rates to reflect slowing demand on the asset side of the balance sheet, resulting in some customers moving funds to higher yielding investments. With diminished loan demand, we have sufficient liquidity to fund our balance sheet without relying on funding other than customer deposits. Because we are not well-capitalized under prompt corrective action, we are unable to renew existing brokered certificates. We currently have $40.3 million of brokered deposits with approximately $10 million coming due in 2011 and the remainder in 2012. We do not plan on increasing our brokered certificates in the near future and have sufficient liquidity to pay off the brokered certificates as they mature.

Other Funding Sources

At June 30, 2010, the Bank had sufficient qualifying collateral pledged to the Federal Reserve Bank of Atlanta to secure discount window capacity of approximately $23 million.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Liquidity

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A company may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities, and accessibility to market sources of funds. Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits to meet asset/liability objectives consistent with local market conditions.

Management continues to emphasize programs to generate local core deposits as our primary funding source. The stability of our core deposit base is an important factor in our liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility. Management regularly monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits as needed.

At June 30, 2010 we had loan commitments outstanding of $22.9 million and standby letters of credit of $2.6 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As disclosed in the Company’s consolidated statement of cash flows, net cash provided by operating activities was $18.6 million for the six months ended June 30, 2010. Included in the net cash provided by operating activities is $16.9 million in income tax refunds. Our net loss of $1.4 million included non-cash losses relating to the fair market valuation of foreclosed properties in the amount of $3.0 million and securities gains of $987,000. Net cash provided by investing activities of $14.0 million consisted primarily of cash provided from a decrease in investment securities of $16.3 million, and a decrease in loans of $5.3 million offset by a $9.1 million increase in overnight balances and interest bearing deposits in banks. The $32.5 million of net cash used in financing activities consisted primarily of a net decrease in deposits of $31.8 million. In the opinion of management, the Company’s liquidity position at June 30, 2010 is sufficient to meet its expected cash flow requirements.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Capital Resources

At June 30, 2010, we were considered significantly undercapitalized under regulatory guidelines. The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the actual capital ratios for Henry County Bancshares, Inc. and the Bank as of June 30, 2010 are as follows:

	Consolidated		Bank		Well Capitalized Regulatory Requirement
Leverage Capital Ratios	3.48	%	3.45	%	5.00	%
Risk Based Capital Ratios:
Tier 1	4.19	%	4.16	%	6.00	%
Total	5.45	%	5.41	%	10.00	%

The Company has been adversely impacted by the continuing deterioration of the Metropolitan Atlanta real estate market causing continuing losses at the Bank, resulting in the Bank being deemed significantly undercapitalized at June 30, 2010. On May 14, 2010, the Bank entered into a Stipulation and Consent Agreement with the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “Department”) (collectively, the “Supervisory Authorities”) agreeing to the issuance of a Consent Order (the “Order”). The Order stipulates, among other conditions, that the Bank reach and maintain a Tier 1 capital ratio equal to or exceeding 8%. There is no assurance that the Bank’s capital can be increased to the level required by the Supervisory Authorities. Also, should the Bank’s capital not be increased to the level set forth in the Order, it is uncertain what action the Supervisory Authorities will take. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Capital Committee of the Board of Directors continues to review various alternatives for increasing the Bank’s capital and has asked management to prepare the necessary documentation to use in an offering of common stock at such time that it is deemed appropriate to offer common stock for sale to its current stockholders and other qualified investors. However, there can be no assurance that any offering of common stock will be successful in raising sufficient capital to return the Bank to the required capital levels.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

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 economic value of equity over a twelve-month period is subjected up to a 400 basis point increase and decrease in rates. Our June 30, 2010 model reflects a 16.4% increase in economic value of equity for a 100 basis point increase in rates. The same model shows a 20.1% decrease in economic value of equity for a 100 basis point decrease in rates. Our asset/liability committee monitors changes on a quarterly basis, measures the changing values based on the model’s performance and determines an appropriate interest rate policy for management to follow in order to minimize the impact on earnings and economic value of equity in the projected rate environment.

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.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

II—OTHER INFORMATION

ITEM 5. OTHER INFORMATION

As a result of examination findings in mid 2009 by the Georgia Department of Banking and Finance, (the “DBF”) and the Federal Deposit Insurance Corporation (the “FDIC”), (collectively, the “Supervisory Authorities”), the Bank’s Directors, on May 7, 2010, entered into a Stipulation and Consent Agreement with the Supervisory Authorities agreeing to the issuance of a Consent Order (the “Order”). Specifically, the Order requires:

• increased involvement by the Bank’s Board of Directors;

• an assessment of current and future management and staffing needs;

• reductions in adversely classified assets;

• improvement in the overall quality and management of the loan portfolio;

• adequate allowance for loan losses;

• a Tier I leverage capital ratio of not less than 8% and a Total Risk Based capital ratio of not less than 10%;

• establishment of a plan to maintain adequate liquidity including a prohibition on accepting brokered deposits and a limitation on interest rates paid on all deposits;

• prior Supervisory Authority approval to pay cash dividends or Board of Director compensation;

• the adoption of an annual strategic plan and budget.

The Order also establishes both a framework and timeframes for the Bank reporting on its compliance with the provisions of the Order. Most of the provisions of the proposed Order are already being addressed by management, thus it is not contemplated that the Order will significantly change how the Bank is currently being operated. However, there can be no assurance that the Bank will be successful in meeting all of the requirements of the Order.

If we fail to adequately address, or make substantial progress towards resolution of the regulatory concerns in the Order, the Supervisory Authorities may take further action including, but not limited to, additional requirements for maintaining sufficient capital under the Order. An ongoing failure to adequately address or make substantial progress towards addressing the concerns of the Supervisory Authorities could ultimately result in the eventual appointment of a receiver or conservator of the Bank’s assets.

The Supervisory Authorities examined the Bank during June and July 2010. Although the final report has not been issued, the Bank believes that the findings of the Supervisory Authorities are fully reflected in the accompanying financial statements.

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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

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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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

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 13, 2010	BY:	/s/ David H. Gill
		David H. Gill, President and CEO
		(Principal Executive Officer)
DATE: August 13, 2010	BY:	/s/ Charles W. Blair, Jr.
		Charles W. Blair, Jr., EVP & CFO
		(Principal Financial and Accounting Officer)

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