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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







Form 10-K





x Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007

Commission File No.
000-49789





HENRY COUNTY BANCSHARES, INC.

(Name
of Issuer as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1485511                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|4806 N. Henry Boulevard Stockbridge, Georgia |  | 30281     
|(Address of Principal Executive Offices)     |  | (Zip Code)

(770) 474-7293

Issuers Telephone Number, Including Area Code





Securities registered
pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $2.50 PAR VALUE

(Title of Class)





Indicate by check mark whether
the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes   ̈     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 past 90 days.    Yes  x    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.    x

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, 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.
(Check one):



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act of 1934).    Yes   ̈    No  x

State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of June 30, 2007:
$170,969,184 (based on the stock price of $13.50 as of that date).

Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date: 14,245,690 shares of $2.50 par value common stock as of March 8, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information required by Part III of this Annual Report are
incorporated by reference from the Registrants definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual
Report.









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Table of Contents



|                                     |  |                                                                                                              |  |     
|------------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                     |  |                                                                                                              |  | Page
|                                     | 
|PART I                               |  |                                                                                                             
|                                     | 
|Forward Looking Statement Disclosure |  | 3                                                                                                           
|                                     |  |                                                                                                             
|Item 1.                              |  | Business                                                                                                     |  | 4   
|Item 1A.                             |  | Risk Factors                                                                                                 |  | 17  
|Item 1B.                             |  | Unresolved Staff Comments                                                                                    |  | 21  
|Item 2.                              |  | Properties                                                                                                   |  | 21  
|Item 3.                              |  | Legal Proceedings                                                                                            |  | 22  
|Item 4.                              |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|                                     | 
|PART II                              |  |                                                                                                             
|                                     |  |                                                                                                             
|Item 5.                              |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 23  
|Item 6.                              |  | Selected Financial Data                                                                                      |  | 27  
|Item 7.                              |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 28  
|Item 7A.                             |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 53  
|Item 8.                              |  | Financial Statements and Supplementary Data                                                                  |  | 54  
|Item 9.                              |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 55  
|Item 9A.                             |  | Controls and Procedures                                                                                      |  | 55  
|Item 9B.                             |  | Other Information                                                                                            |  | 58  
|                                     | 
|PART III                             |  |                                                                                                             
|                                     |  |                                                                                                             
|Item 10.                             |  | Directors, Executive Officers and Corporate Governance                                                       |  | 58  
|Item 11.                             |  | Executive Compensation                                                                                       |  | 58  
|Item 12.                             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 58  
|Item 13.                             |  | Certain Relationships and Related Transactions and Director Independence                                     |  | 58  
|Item 14.                             |  | Principal Accounting Fees and Services                                                                       |  | 59  
|                                     | 
|PART IV                              |  |                                                                                                             
|                                     |  |                                                                                                             
|Item 15.                             |  | Exhibits and Financial Statement Schedules                                                                   |  | 59  
|                                     | 
|Signatures                           |  | 59                                                                                                          
|                                     | 
|Index to Exhibits                    |  |                                                                                                             



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Forward Looking Statement Disclosure

Statements in this Annual Report regarding future events or performance
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the PSLRA) and are made pursuant to the safe harbors of the PSLRA. Actual results of Henry County Bancshares, Inc.
(the Company) could be quite different from those expressed or implied by the forward-looking statements. Any statements containing the words could, may, will, should, plan,
believes, anticipates, estimates, predicts, expects, projections, potential, continue, or words of similar import, constitute forward-looking
statements, as do any other statements that expressly or implicitly predict future events, results, or performance. Factors that could cause results to differ from results expressed or implied by our forward-looking statements include, among
others, risks discussed in the text of this Annual Report as well as the following specific items:



| |  | General economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Competitive factors, including increased competition with community, regional, and national financial institutions, that may lead to pricing pressures that reduce
yields the Company achieves on loans and increase rates the Company pays on deposits, loss of the Companys most valued customers, defection of key employees or groups of employees, or other losses;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increasing or decreasing interest rate environments, including the shape and level of the yield curve, that could lead to decreases in net interest margin, lower
net interest and fee income, including lower gains on sales of loans, and changes in the value of the Companys investment securities;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changing business or regulatory conditions or new legislation, affecting the financial services industry that could lead to increased costs, changes in the
competitive balance among financial institutions, or revisions to our strategic focus;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes or failures in technology or third party vendor relationships in important revenue production or service areas, or increases in required investments in
technology that could reduce our revenues, increase our costs or lead to disruptions in our business.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Readers are
cautioned not to place undue reliance on our forward-looking statements, which reflect managements analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect
events or circumstances that arise after the date of this report.

Readers should carefully review all disclosures we file from time to
time with the Securities and Exchange Commission (the SEC).



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Part I



|Item 1. | BUSINESS
|------- | --------

General

Henry County Bancshares, Inc. (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 also conducts mortgage lending operations through the Banks wholly owned subsidiary, First Metro Mortgage Co., which provides the
Banks customers with a wide range of mortgage banking services and products.

The Company, through the Bank and First Metro Mortgage
Co., derives substantially all of its income from the furnishing of banking and banking related services.

The Company directs the policies
and coordinates the financial resources of the Bank. The Company provides and performs various technical and advisory services for its subsidiaries, coordinates their general policies and activities, and participates in their major decisions.

The Companys filings with the SEC, including its annual report on Form 10-K, quarterly reports on Form 10-Q, periodic reports on
Form 8-K and amendments to these reports, are accessible free of charge at our website at http://www.firststateonline.com as soon as reasonably practicable after filing with the SEC. By making this reference to our website, we do not intend
to incorporate into this report any information contained in the website. The website should not be considered part of this report.

The
SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers including the Company that file electronically with the SEC.

The First State Bank, Stockbridge, Georgia

The Bank
was chartered by the Georgia Department of Banking and Finance in 1964. The Bank operates through its main office at 4806 North Henry Boulevard, Stockbridge, Georgia, as well as six (6) full service branches located at 1810 Hudson Bridge Road
in Stockbridge, 295 Fairview Road in Ellenwood, 114 John Frank Ward Boulevard in McDonough, 4979 Bill Gardner Parkway in Locust Grove, 2316 Highway 155 in McDonough and 1908 Highway 81 East in McDonough. The Bank owns two lots for the construction
of future branches, one at the intersection of Chambers Road



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and Jonesboro Road in Henry County, as well as one in Butts County located at 620 W. Third Street in Jackson. The Bank owns an additional parcel of real
estate adjacent to its main office location in Stockbridge, Georgia, upon which is situated a small house leased to an unaffiliated insurance company.

The Bank engages in a full service commercial and consumer banking business in its primary market area of Henry County and surrounding counties, as well as a variety of deposit services provided to its customers. The
Bank offers on-line banking services to its customers. Checking, savings, money market accounts and other time deposits are the primary sources of the Banks funds for loans and investments. The Bank offers a full complement of lending
activities, including commercial, consumer installment, real estate, home equity and second mortgage loans, with particular emphasis on short and medium term obligations. Commercial lending activities are directed principally to businesses whose
demands for funds fall within the Banks lending limits. Consumer lending is oriented primarily to the needs of the Banks customers. Real estate loans include short term acquisition and construction loans. The Bank focuses primarily on
residential and commercial construction loans, commercial loans secured by machinery and equipment with a developed resale market, working capital loans on a secured short term basis to established businesses in the primary service area, home equity
loans of up to 80% of the current market value of the underlying real estate, residential real estate loans of up to 90% of value with adjustable rates or balloon payments due within five (5) years, and loans secured by savings accounts, other
time accounts, cash value of life insurance, readily marketable stocks and bonds, or general use machinery and equipment for which a resale market has developed. The Bank makes both secured and unsecured loans to persons and entities which meet
criteria established by the Bank and the executive committee. Approximately 94% of the Banks loan portfolio is concentrated in loans secured by real estate, most of which is located in the Banks primary market area. The Bank, as a matter
of state law and bank policy, does not extend credit to any single borrower or group of related borrowers in excess of 25% of statutory capital, or approximately $12,000,000. The lending policies and procedures of the Bank are periodically reviewed
and modified by the Board of Directors of the Bank in order to ensure risks are acceptable and to protect the Banks financial position in the market. Among other services offered are drive-up windows, night deposits, safe deposits,
travelers checks, credit cards, cashiers checks, notary public and other customary bank services. The Bank does not offer trust services.

The Bank maintains correspondent relationships with Silverton Bank, SunTrust Bank, Federal Home Loan Bank, and the Federal Reserve Bank of Atlanta. These banks provide certain services to the Bank such as investing
excess funds, wire transfer of funds, safekeeping of investment securities, loan participation and investment advice.

The banking business
in and around Henry County, Georgia is highly competitive which includes certain major banks which have acquired formerly locally owned institutions. These banks have considerably greater resources and lending limits than the Bank. In addition to
commercial banks and savings banks, the Bank competes with other financial institutions, such as credit unions, agricultural credit associations, and investment firms which provide services similar to checking accounts and commercial lending. The
Bank competes with numerous institutions within the primary



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service areas, including local branches of Bank of America, SunTrust Bank, Wachovia and BB&T. As of December 31, 2007 the Bank held approximately
28% of the deposit accounts in the Henry County area. Neither the Company nor the Bank generates a material amount of revenue from foreign countries, nor does either have material long-lived assets, customer relationships, mortgages or servicing
rights, deferred policy acquisition costs, or deferred tax assets in foreign countries. Thus, the Company has no significant risks attributable to foreign operations.

The Bank relies substantially on personal conduct of its officers, directors and shareholders, as well as a broad product line, competitive services, and an aggressive local advertising campaign and promotional
activities to attract business and to acquaint potential customers with the Banks personal services. The Banks marketing approach emphasizes the advantages of dealing with an independent, locally owned and headquartered commercial bank
attuned to the particular needs of small to medium size businesses, professionals and individuals in the community.

As of
December 31, 2007, the Bank had 142 full-time employees and 18 part-time employees. None of the Banks employees are represented by a collective bargaining group. The Bank considers its relationships with the employees to be good.

A history of the Banks financial position for the fiscal years ended December 31, 2005, 2006 and 2007, is as follows:



|               |  |             |             |      |   |             |  |   |            
|-------------- |  | ----------- | ----------- | ---- | - | ----------- |  | - | -----------
|               |  | Years Ended
|               |  | 2007        |             | 2006 |   | 2005       
|Total Assets   |  | $           | 718,996,049 |      | $ | 694,310,816 |  | $ | 631,033,297
|               |  |             |            
|Total Deposits |  | $           | 625,851,121 |      | $ | 594,873,414 |  | $ | 545,247,129
|               |  |             |            
|Net Income     |  | $           | 8,708,726   |      | $ | 12,409,292  |  | $ | 10,275,922 

First Metro Mortgage Co.

First Metro Mortgage Co. was formed in 1985 to provide mortgage loan origination services in the same primary market area as the Bank. Its offices are located at the Banks branch facility on Hudson Bridge Road
in Stockbridge, Georgia. First Metro Mortgage Co. initiates long term mortgage loans but immediately sells those loans in the secondary market to investors pursuant to agreements between the investors and the company prior to funding. All loans are
sold without recourse, and the Bank does not retain servicing rights or obligations with respect to those loans. First Metro Mortgage Co. realized net loss of $121,124 for 2007 as compared with a net loss of $110,029 for 2006, and a net loss of
$42,624 in 2005. First Metro Mortgage Co. was merged into and became a subsidiary of The First State Bank, effective July 1, 2003.



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Supervision and Regulation

Bank Holding Company RegulationsHenry County Bancshares, Inc.

The Company is a registered
holding company under the Federal Bank Holding Company Act and the Georgia Bank Holding Company Act and is regulated under such act by the Board of Governors of Federal Reserve System (the Federal Reserve) and by the Georgia Department
of Banking and Finance (the GDB&F), respectively.

Reporting and Examination

As a bank holding company, the Company is required to file annual reports with the Federal Reserve and the GDB&F and provide such additional
information as the applicable regulator may require pursuant to the Federal and Georgia Bank Holding Company Acts. The Federal Reserve and the GDB&F may also conduct examinations of the Company to determine whether the Company is in compliance
with Bank Holding Company Acts and regulations promulgated thereunder.

Acquisitions

The Federal Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (1) acquiring
direct or indirect ownership or control of more than 5% of the voting shares of any bank; (2) acquiring all or substantially all of the assets of a bank; and (3) before merging or consolidating with another bank holding company. A bank
holding company is also generally prohibited from engaging in, or acquiring, direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities, unless the Federal Reserve has found
those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases, engaging in certain insurance and discount brokerage activities, performing certain data processing services, acting in certain circumstances as a fiduciary or investment
or financial advisor, owning savings associations, and making investments in certain corporations for projects designed primarily to promote community welfare.

The GDB&F requires similar approval prior to the acquisition of any additional banks. A Georgia bank holding company is generally prohibited from acquiring ownership or control of 5% or more of the voting shares
of a bank unless the bank being acquired is either a bank for purposes of the Federal Bank Holding Company Act, or a federal or state savings and loan association or savings bank or federal savings bank whose deposits are insured by the Federal
Savings and Loan Insurance Corporation and such bank has been in existence and continuously operating as a bank for a period of three years or more prior to the date of application to the Department for approval of such acquisition.

Source of Strength to Subsidiary Banks

The Federal
Reserve (pursuant to regulation and published statements) has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In



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adhering to the Federal Reserve policy, the Company may be required to provide financial support to its subsidiary banks at a time when, absent such Federal
Reserve policy, the Company may not deem it advisable to provide such assistance. Similarly, the Federal Reserve also monitors the financial performance and prospects of non-bank subsidiaries with an inspection process to ascertain whether such
non-banking subsidiaries enhance or detract from the Companys ability to serve as a source of strength for its subsidiary banks.

Capital
Requirements

The Company is subject to regulatory capital requirements imposed by the Federal Reserve applied on a consolidated basis
with banks owned by the Company. Bank holding companies must have capital (as defined in the rules) equal to eight (8) percent of risk-weighted assets. The risk weights assigned to assets are based primarily on credit risk. For example,
securities with an unconditional guarantee by the United States government are assigned the least risk category. A risk weight of 50% is assigned to loans secured by owner-occupied one-to-four family residential mortgages. The aggregate amount of
assets assigned to each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.

The Federal Reserve also requires the maintenance of minimum capital leverage ratios to be used in tandem with the risk-based guidelines in assessing the
overall capital adequacy of bank holding companies. The guidelines define capital as either Tier 1 (primarily shareholder equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan losses). Tier 1 capital for banking
organizations includes common equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock and qualifying cumulative perpetual preferred stock. (Cumulative perpetual preferred
stock is limited to 25 percent of Tier 1 capital.) Tier 1 capital excludes goodwill; amounts of mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships that, in the aggregate, exceed 100 percent of Tier 1
capital; nonmortgage servicing assets and purchased credit card relationships that in the aggregate, exceed 25 percent of Tier 1 capital; all other identifiable intangible assets; and deferred tax assets that are dependent upon future taxable
income, net of their valuation allowance, in excess of certain limitations.

Effective June 30, 1998, the Federal Reserve has
established a minimum ratio of Tier 1 capital to total assets of 3.0 percent for strong bank holding companies (rated composite 1 under the BOPEC rating system of bank holding companies), and for bank holding companies that have
implemented the Boards risk-based capital measure for market risk. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4.0 percent. Banking organizations with supervisory, financial, operational, or
managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. Higher capital ratios may be required for any bank holding company if
warranted by its particular circumstances or risk profile. Bank holding companies are required to hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed.



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As of December 31, 2007 the Company maintained Tier 1 and Total Risk-Based Capital Ratios of 12.13%
and 13.37%, respectively. A more detailed analysis of the Companys capital and comparison to regulatory requirements is included in Note 12 in the audited financial statements included herein.

The Riegle-Neal Interstate Banking and Branching Efficiency Act

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act) regulates the interstate activities of banks and bank holding companies. Generally speaking, under the
Interstate Banking Act, a bank holding company located in one state may lawfully acquire a bank located in any other state, subject to deposit-percentage, aging requirements and other restrictions. The Interstate Banking Act also generally provides
that national and state-chartered banks may, subject to applicable state law, branch interstate through acquisitions of banks in other states. The Interstate Banking Act and related California laws have increased competition in the environment in
which the Bank operates to the extent that out-of-state financial institutions directly or indirectly enter the Banks market areas. It appears that the Interstate Banking Act has contributed to the accelerated consolidation of the banking
industry.

The Gramm-Leach-Bliley Act of 1999

Effective March 11, 2000, the Gramm-Leach-Bliley Act, also known as the Financial Modernization Act, enabled full affiliations to occur among banks and securities firms, insurance companies, and other financial service
providers, and enabled full affiliations to occur between such entities. This legislation permits bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become financial holding
companies. As financial holding companies, they and their subsidiaries are permitted to acquire or engage in activities that were not previously allowed by bank holding companies such as insurance underwriting, securities underwriting and
distribution, travel agency activities, broad insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities. Financial holding companies continue
to be subject to the overall oversight and supervision of the Federal Reserve, but the Financial Modernization Act applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be
subject to supervision and regulation by state insurance authorities. The Company has no current intention of becoming a financial holding company, but may do so at some point in the future if deemed appropriate in view of opportunities or
circumstances at the time.

The Financial Modernization Act also imposed new requirements on financial institutions with respect to
consumer privacy. The statute generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are
further required to disclose their privacy policies



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to consumers annually. Financial institutions, however, will be required to comply with state law if it is more protective of consumer privacy than the
Financial Modernization Act. The statute also directed federal regulators, including the Federal Reserve and the FDIC, to prescribe standards for the security of consumer information. The Company and the Bank are subject to such standards, as well
as standards for notifying consumers in the event of a security breach.

Regulation of Subsidiary Banks

As a state-chartered bank, The First State Bank is examined and regulated by the Federal Deposit Insurance Corporation (the FDIC) and the
GDB&F. The major functions of the FDIC with respect to insured banks include paying depositors to the extent provided by law in the event an insured bank is closed without adequately providing for payment of the claim of depositors, acting as a
receiver of state banks placed in receivership when so appointed by state authorities, and preventing the continuance or development of unsound and unsafe banking practices. In addition, the FDIC also approves conversions, mergers, consolidations,
and assumption of deposit liability transactions between insured banks and noninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continued or assumed bank is an insured nonmember state
bank.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Bank Holding Company Act on
any extension of credit to the bank holding company or any of its subsidiaries, on investment in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. In addition, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in-arrangements in connection with any extension of credit or provision of any property or services.

The GDB&F regulates all areas of the banks banking operations, including mergers, establishment of branches, loans, interest rates, and
reserves. The Bank must have the approval of the GDB&F to pay cash dividends, unless at the time of such payment:

a. the total
classified assets at the most recent examination of such bank do not exceed 80% of Tier 1 capital plus Allowance for Loan Losses as reflected at such examination;

b. the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits, after taxes but before dividends, for the previous calendar year; and

c. the ratio of Tier 1 Capital to Adjusted Total Assets shall not be less than six (6) percent.

State chartered banks are also subject to State of Georgia banking and usury laws restricting the amount of interest which it may charge in making loans
or other extensions of credit.



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Expansion through Branching, Merger or Consolidation

With respect to expansion, the banks were previously prohibited from establishing branch offices or facilities outside of the county in which their main
office was located, except:



| | (1) | in adjacent counties in certain situations, or
| | --- | ----------------------------------------------



| | (2) | by means of merger or consolidation with a bank which has been in existence for at least five years.
| | --- | ----------------------------------------------------------------------------------------------------

In addition, in the case of a merger or consolidation, the acquiring bank must have been in existence for at least 24 months prior to the merger. However, effective July 1, 1998, Georgia law permits, with
required regulatory approval, the establishment of de novo branches in an unlimited number of counties within the State of Georgia by the subsidiary bank(s) of bank holding companies then engaged in the banking business in the State of Georgia. This
law may result in increased competition in the market area of the Companys subsidiary banks.

Capital Requirements

The FDIC adopted risk-based capital guidelines that went into effect on December 31, 1990 for all FDIC insured state chartered banks that are not
members of the Federal Reserve System. Beginning December 31, 1992, all banks were required to maintain a minimum ratio of total capital to risk weighted assets of eight (8) percent of which at least four (4) percent must consist of
Tier 1 capital. Tier 1 capital of state chartered banks (as defined by the regulation) generally consists of: (i) common stockholders equity; (ii) qualifying noncumulative perpetual preferred stock and related surplus; and
(iii) minority interests in the equity accounts of consolidated subsidiaries. In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets of banks, referred to as the leverage capital ratio of three (3) percent if the
FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings and, in general is
considered a strong banking organization, rated Composite 1 under the Uniform Financial Institutions Rating System (the CAMEL rating system) established by the Federal Financial Institutions Examination Council. All other financial
institutions are required to maintain leverage ratio of four (4) percent.

Effective October 1, 1998, the FDIC amended its
risk-based and leverage capital rules as follows: (1) all servicing assets and purchase credit card relationships (PCCRs) that are included in capital are each subject to a ninety percent (90%) of fair value limitation (also
known as a ten percent (10%) haircut); (2) the aggregate amount of all servicing assets and PCCRs included in capital cannot exceed 100% of Tier I capital; (3) the aggregate amount of nonmortgage servicing assets
(NMSAs) and PCCRS included in capital cannot exceed 25% of Tier 1 capital; and (4) all other intangible assets (other than qualifying PCCRS) must be deducted from Tier 1 capital.



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Amounts of servicing assets and PCCRs in excess of the amounts allowable must be deducted in determining
Tier 1 capital. Interest-only Strips receivable, whether or not in security form, are not subject to any regulatory capital limitation under the amended rule.

FDIC Insurance Assessments

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), enacted
in December 1991, provided for a number of reforms relating to the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. One aspect of the act is
the requirement that banks will have to meet certain safety and soundness standards. In order to comply with the act, the Federal Reserve and the FDIC implemented regulations defining operational and managerial standards relating to internal
controls, loan documentation, credit underwriting, interest rate exposure, asset growth, director and officer compensation, fees and benefits, asset quality, earnings and stock valuation.

The regulations provide for a risk based premium system which requires higher assessment rates for banks which the FDIC determines pose greater risks to
the Bank Insurance Fund (BIF). Under the regulations, banks pay an assessment depending upon risk classification.

To arrive at
risk-based assessments, the FDIC places each bank in one of nine risk categories using a two step process based on capital ratios and on other relevant information. Each bank is assigned to one of three groups: (i) well capitalized,
(ii) adequately capitalized, or (iii) under capitalized, based on its capital ratios. The FDIC also assigns each bank to one of three subgroups based upon an evaluation of the risk posed by the bank. The three subgroups include
(i) banks that are financially sound with only a few minor weaknesses, (ii) banks with weaknesses which, if not corrected, could result in significant deterioration of the bank and increased risk to the BIF, and (iii) those banks that
pose a substantial probability of loss to the BIF unless corrective action is taken. FDICIA imposes progressively more restrictive constraints on operations management and capital distributions depending on the category in which an institution is
classified. As of December 31, 2007, The First State Bank met the definition of a well-capitalized institution.

Under FDICIA
insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.

Community Reinvestment Act

The Company and the Bank are subject to the provisions of the Community Reinvestment Act of 1977, as amended (the CRA) and the federal banking agencies regulations issued thereunder. Under the CRA,
all banks and thrifts have a continuing and affirmative obligation, consistent with its safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or



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programs for financial institutions, nor does it limit an institutions discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA.

The CRA requires a depository institutions primary federal
regulator, in connection with its examination of the institution, to assess the institutions record of assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods. The
regulatory agencys assessment of the institutions record is made available to the public. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the
records of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application.

The evaluation system used to judge an institutions CRA performance consists of three tests: (1) a lending test; (2) an investment test; and (3) a service test. Each of these tests will be applied
by the institutions primary federal regulator taking into account such factors as: (i) demographic data about the community; (ii) the institutions capacity and constraints; (iii) the institutions product offerings
and business strategy; and (iv) data on the prior performance of the institution and similarly-situated lenders.

In addition, a
financial institution will have the option of having its CRA performance evaluated based on a strategic plan of up to five years in length that it had developed in cooperation with local community groups. In order to be rated under a strategic plan,
the institution will be required to obtain the prior approval of its federal regulator.

The interagency CRA regulations provide that an
institution evaluated under a given test will receive one of five ratings for the test: (1) outstanding; (2) high satisfactory; (3) low satisfactory; (4) needs to improve; and (5) substantial noncompliance. An institution
will receive a certain number of points for its rating on each test, and the points are combined to produce an overall composite rating. Evidence of discriminatory or other illegal credit practices would adversely affect an institutions
overall rating. The First State Bank received a satisfactory rating as a result of its most recent CRA examination.

Anti-Terrorism Legislation

In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (the USA PATRIOT Act) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions
and account relationships as well as enhanced due diligence and know your customer standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and
controls generally require financial institutions to take reasonable steps:



| |  |  | to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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| |  |  | to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering
and report any suspicious transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the
ownership interest of each such owner; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due
diligence information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs.
The USA PATRIOT Act sets forth minimum standards for these programs, including:



| |  |  | the development of internal policies, procedures, and controls;
| | - |  | ---------------------------------------------------------------



| |  |  | the designation of a compliance officer;
| | - |  | ----------------------------------------



| |  |  | an ongoing employee training program; and
| | - |  | -----------------------------------------



| |  |  | an independent audit function to test the programs.
| | - |  | ---------------------------------------------------

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities
regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed
to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) was enacted to increase corporate responsibility, provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of disclosures pursuant to the securities laws. Sarbanes-Oxley includes important new requirements for public
companies in the areas of financial disclosure, corporate governance, and the independence, composition and responsibilities of audit committees. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer
certifications of periodic financial reports, additional financial disclosures concerning off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders. In addition,



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penalties for non-compliance with the Exchange Act were heightened. SEC rules promulgated pursuant to Sarbanes-Oxley impose obligations and restrictions on
auditors and audit committees intended to enhance their independence from management, and include extensive additional disclosure, corporate governance and other related rules. Sarbanes-Oxley represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a Board of Directors and Management and between a Board of Directors and its
committees.

We have not experienced any significant difficulties in complying with Sarbanes-Oxley. However, we have incurred, and expect
to continue to incur, significant costs in connection with compliance with Section 404 of Sarbanes-Oxley, which requires Management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting
and requires our auditors to attest to, and report on, Managements assessment and the operating effectiveness of these controls.

Commercial Real
Estate Lending and Concentrations

On December 2, 2006, the federal bank regulatory agencies released Guidance on Concentrations in
Commercial Real Estate (CRE) Lending, Sound Risk Management Practices (the Guidance). The Guidance, which was issued in response to the agencies concern that rising CRE concentrations might expose institutions to
unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market, reinforces existing regulations and guidelines for real estate lending and loan portfolio management.

Highlights of the Guidance include the following:



| |  |  | The agencies have observed that CRE concentrations have been rising over the past several years with small to mid-size institutions showing the most significant
increase in CRE concentrations over the last decade. However, some institutions risk management practices are not evolving with their increasing CRE concentrations, and therefore, the Guidance reminds institutions that strong risk management
practices and appropriate levels of capital are important elements of a sound CRE lending program.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Guidance applies to national banks and state chartered banks and is also broadly applicable to bank holding companies. For purposes of the Guidance, CRE loans
include loans for land development and construction, other land loans and loans secured by multifamily and nonfarm residential properties. The definition also extends to loans to real estate investment trusts and unsecured loans to developers if
their performance is closely linked to the performance of the general CRE market.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The agencies recognize that banks serve a vital role in their communities by supplying credit for business and real estate development. Therefore, the Guidance is
not intended to limit banks CRE lending. Instead, the Guidance encourages institutions to identify and monitor credit concentrations, establish internal concentration limits, and report all concentrations to management and the board of
directors on a periodic basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The agencies recognized that different types of CRE lending present different levels of risk, and therefore, institutions are encouraged to segment their CRE
portfolios to acknowledge these distinctions. However, the CRE portfolio should not be divided into multiple sections simply to avoid the appearance of risk concentration.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Institutions should address the following key elements in establishing a risk management framework for identifying, monitoring, and controlling CRE risk:
(1) board of directors and management oversight; (2) portfolio management; (3) management information systems; (4) market analysis; (5) credit underwriting standards; (6) portfolio stress testing and sensitivity
analysis; and (7) credit review function.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As part of the ongoing supervisory monitoring processes, the agencies will use certain criteria to identify institutions that are potentially exposed to significant
CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds specified supervisory criteria may be identified for further supervisory analysis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company believes that the Guidance is applicable to it, as it has a concentration in CRE loans. The Company and its
board of directors have discussed the Guidance and believe that the Companys underwriting policy, management information systems, independent credit administration process and monthly monitoring of real estate loan concentrations will be
sufficient to address the Guidance.

Allowance for Loan and Lease Losses

On December 13, 2006, the federal bank regulatory agencies released Interagency Policy Statement on the Allowance for Loan and Lease Losses
(ALLL), which revises and replaces the banking agencies 1993 policy statement on the ALLL. The revised statement was issued to ensure consistency with generally accepted accounting principles (GAAP) and more recent supervisory
guidance. The revised statement extends the applicability of the policy to credit unions. Additionally, the agencies issued 16 FAQs to assist institutions in complying with both GAAP and ALLL supervisory guidance.



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Highlights of the revised statement include the following:



| |  |  | The revised statement emphasizes that the ALLL represents one of the most significant estimates in an institutions financial statements and regulatory reports
and that an assessment of the appropriateness of the ALLL is critical to an institutions safety and soundness.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Each institution has a responsibility to develop, maintain, and document a comprehensive, systematic, and consistently applied process for determining the amounts
of the ALLL. An institution must maintain an ALLL that is sufficient to cover estimated credit losses on individual impaired loans as well as estimated credit losses inherent in the remainder of the portfolio.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The revised statement updates the previous guidance on the following issues regarding ALLL: (1) responsibilities of the board of directors, management, and
bank examiners; (2) factors to be considered in the estimation of ALLL; and (3) objectives and elements of an effective loan review system.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company and its board of directors have discussed the revised statement and believe that the Companys ALLL methodology is comprehensive, systematic, and that it is consistently applied across the Company.
The Company believes its management information systems, independent credit administration process, policies and procedures are sufficient to address the guidance.

Other Pending and Proposed Legislation

Other legislative and regulatory initiatives which could affect the Company, the
Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced, before the U.S. Congress, the Georgia legislature and other governmental bodies in the future. Such proposals, if enacted, may further
alter the structure, regulation and competitive relationship among financial institutions, and may subject the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new
rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected
thereby.



|Item 1A. | RISK FACTORS
|-------- | ------------

The following are certain risks that
management believes are specific to our business. This should not be viewed as an all inclusive list or in any particular order.



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Our business is subject to the success of the local economies where we operate

Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets. If the
communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. We are currently experiencing adverse economic conditions in our market areas, which affect the
ability of our customers to repay their loans to us and generally negatively affect our financial condition and results of operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a
large number of diversified economies and are thus disproportionately impacted.

The market value of the real estate securing our loans as
collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in our market areas and could be further adversely affected in the future. As of December 31, 2007, approximately 94% of our loans
receivable were secured by real estate. Any sustained period of increased payment delinquencies, foreclosures or losses caused by the adverse market and economic conditions, including the downturn in the real estate market in the State of Georgia
will adversely affect the value of our assets, our revenues, results of operations and financial condition. Currently, we are experiencing such an economic downturn, and if it continues, our operations could be further adversely affected.

We make and hold in our portfolio a significant number of land acquisition and development and construction loans, which in todays real estate
market pose more credit risk than other types of loans typically made by financial institutions

We offer land acquisition and
development and construction loans for builders and developers. As of December 31, 2007, approximately $256 million of our loan portfolio represents loans for which the related property is neither presold nor preleased. These land acquisition
and development and construction loans are considered more risky than other types of residential mortgage loans. The primary credit risks associated with land acquisition and development and construction lending are underwriting, project risks and
market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks. Market risks are risks associated with the sale of the completed residential
units and developed lots. They include affordability risk, which means the risk of affordability of financing by borrowers, product design risk, and risks posed by competing projects. While we believe we have established adequate reserves on our
financial statements to cover the credit risk of our land acquisition and development and construction loan portfolio, there can be no assurance that losses will not exceed our reserves, which could adversely impact our earnings. Given the current
environment, the non-performing loans in our land acquisition and development and construction portfolio may increase and these non-performing loans could result in a material level of charge-offs, which will negatively impact our capital and
earnings. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation  Risk Elements.



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Current and anticipated deterioration in the housing market and the homebuilding industry may lead to increased loss
severities and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our results of operations may be adversely impacted

There has been substantial industry concern and publicity over asset quality among financial institutions due in large part to issues related to subprime mortgage lending, declining real estate values and general
economic concerns. As of December 31, 2007, our nonperforming assets increased significantly to $47.8 million, or 8.25%, of loans receivable plus other real estate owned. Furthermore, the housing and the residential mortgage markets recently
have experienced a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the
market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

The
homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including some of the markets in which we lend. Our customers who
are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we are facing increased delinquencies and non-performing assets as these builders and developers default on
their loans with us. We do not anticipate that the housing market will improve in the near-term, and accordingly, additional downgrades, provisions for loan losses and charge-offs related to our loan portfolio may occur. See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operation  Risk Elements.

Future loan losses may exceed our
allowance for loan losses.

We are subject to credit risk, which is the risk of losing principal or interest due to borrowers
failure to repay loans in accordance with their terms. A downturn in the economy or the real estate market in our market areas or a rapid change in interest rates could have a negative effect on collateral values and borrowers ability to
repay. This deterioration in economic conditions could result in losses to the Bank in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To
the extent loan charge-offs exceed our financial models, increased amounts charged to the provision for loan losses would reduce income. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation
 Allowances for Loan Losses.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan
losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. As a result of a difficult real estate
market, we have increased our allowance from $5.23 million as of December 31, 2006 to $7.65 million as of December 31, 2007. We expect to continue to increase our allowance in 2008; however, we can make no assurance that our allowance will
be adequate to cover future loan losses given current and future market conditions.



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In addition, federal and state regulators periodically review our allowance for loan losses and may
require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory
agencies would have a negative effect on our operating results.

Rapidly changing interest rate environments could reduce our net interest margin, net
interest income, fee income and net income

As a financial institution, our earnings are significantly dependent upon our net interest
income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings.
Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserves fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net
interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a
result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In response to the dramatic deterioration of the subprime, mortgage, credit and liquidity markets, the Federal Reserve recently has taken action on five occasions to reduce interest rates by a total of 225 basis points since September 2007,
which likely will reduce our net interest income during the first quarter of 2008 and the foreseeable future. This reduction in net interest income likely will be exacerbated by the high level of competition that we face in our markets, which
requires us to offer more attractive interest rates to borrowers, both on loans and deposits. Any reduction in our net interest income will negatively affect our business, financial condition, liquidity, operating results, cash flows and/or the
price of our securities. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation  Quantitative and Qualitative Disclosures about Market Risk.

Slower than anticipated growth in new branches and new product and service offerings could result in reduced net income

We have placed a strategic emphasis on expanding our branch network and product offerings. Executing this strategy carries risks of slower than
anticipated growth both in new branches and new products. New branches and products require a significant investment of both financial and personnel resources. Lower than expected loan and deposit growth in new investments can decrease anticipated
revenues and net income generated by those investments, and opening new branches and introducing new products could result in more additional expenses than anticipated and divert resources from current core operations.



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The financial services industry is very competitive

We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our
competitors include other community banks, larger banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank
businesses. Many of these competitors have substantially greater resources than us. For a more complete discussion of our competitive environment, see Business  Competition in Item 1 above. If we are unable to compete
effectively, we will lose market share and income from deposits, loans, and other products may be reduced.

Inability to hire or retain certain key
professionals, management and staff could adversely affect our revenues and net income

We rely on key personnel to manage and operate
our business, including major revenue generating functions such as our loan and deposit portfolios. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our
revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.

No active trading market for the common stock may ever develop

There is no public market for our common stock and it does
not trade on any national securities exchange or over the counter. We can give no assurance that an active trading market will ever develop for the common stock. If an active trading market does not develop, you may not be able to sell your common
stock when desired at a price that would be acceptable to you.



|Item 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



|Item 2. | PROPERTIES
|------- | ----------

The assets of the Company consist
almost entirely of its equity ownership in The First State Bank and First Metro Mortgage Co. The assets of First Metro Mortgage Co. consist almost entirely of loans originated and the proceeds of those loans when sold to investors. The assets of the
Bank consist primarily of loans and investment securities. However, it also owns the real estate and improvements thereon from which it conducts its banking operations. Those locations are more particularly described as follows:

4806 N. Henry Boulevard, Stockbridge, Georgia - This location houses the Banks main office, a two-story building containing 20,800 square
feet constructed in 1965. It is a full service bank facility equipped with an ATM machine and four lane drive-up service.



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4800 N. Henry Boulevard, Stockbridge, Georgia - This location houses the operations center for the
Bank. It is a single story building constructed in 1999, consisting of 20,622 square feet.

295 Fairview Road, Ellenwood, Georgia -
This is a full service banking location with ATM and drive-thru service. It is a single story building containing 3,520 square feet.

114 John Frank Ward Boulevard, McDonough, Georgia - This site contains a 4,000 square foot single story building with ATM and drive-thru service.

1810 Hudson Bridge Road, Stockbridge, Georgia - This location contains a two-story facility consisting of 4,787 square feet. The lower floor contains a full service banking location with ATM and drive-thru
service. The upper floor houses the operations of First Metro Mortgage Co.

4979 Bill Gardner Parkway, Locust Grove, Georgia - This
location contains a one-story building consisting of 4,000 square feet with ATM and drive-thru service.

2316 Highway 155, McDonough,
Georgia - This full service banking location is a single-story facility consisting of approximately 5,500 square feet with ATM and drive-thru service.

1908 Highway 81 East, McDonough, Georgia - This full service banking location is a single-story facility consisting of approximately 5,500 square feet with ATM and drive-thru service.

The Bank also owns two additional parcels of land, one located in Henry County at the intersection of Chambers Road and Jonesboro Road and one located at
620 W. Third Street in Jackson, Butts County, Georgia.

The Bank conducts its own data processing and owns the equipment used for that
purpose. The Bank also owns the furniture, fixtures and equipment located on its premises and several automobiles.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------

The Bank is involved in various
legal actions from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Companys financial statements. Neither the Bank nor the Company is a party
to any proceeding to which any director, officer or affiliate of the issuer, or any owner of more than five percent (5%) of its voting stock is a party adverse to the Bank or the Company.



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|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Part II



|Item 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------

Stock Price and Dividends

There is no
established public trading market for the Companys common stock. It is not traded on an exchange or in the over-the-counter market. There is no assurance that an active market will develop for the Companys common stock in the future.
Therefore, management of the Company is furnished with only limited information concerning trades of the Companys common stock. The following table sets forth for each quarter during the most two recent fiscal years the number of shares traded
and the high and low per share sales price to the extent known to management.



|               |  |                       |  |                             |       |     |                            |   |       |    
|-------------- |  | --------------------- |  | --------------------------- | ----- | --- | -------------------------- | - | ----- | ---
|YEAR 2007      |  | NUMBEROF SHARESTRADED |  | HIGH SALES PRICE(Per Share) |       |     | LOW SALES PRICE(Per Share) |  
|First Quarter  |  | 14,984                |  | $                           | 13.50 |     |                            | $ | 13.00 |    
|Second Quarter |  | 29,724                |  | $                           | 14.00 |     |                            | $ | 13.50 |    
|Third Quarter  |  | 20,350                |  | $                           | 14.50 |     |                            | $ | 13.50 |    
|Fourth Quarter |  | 170,683               |  | $                           | 13.50 |     |                            | $ | 13.50 |    
|               |  |                       | 
|YEAR 2006      |  | NUMBEROF SHARESTRADED |  | HIGH SALES PRICE(Per Share) |       |     | LOW SALES PRICE(Per Share) |  
|First Quarter  |  | 16,330                |  | $                           | 23.00 |     |                            | $ | 20.50 |    
|Second Quarter |  | 22,867                |  | $                           | 24.00 |     |                            | $ | 21.00 |    
|Third Quarter  |  | 15,868                |  | $                           | 26.00 |     |                            | $ | 23.00 |    
|Fourth Quarter |  | 37,768                |  | $                           | 13.00 | (1) |                            | $ | 12.50 | (1)



|(1) | The fourth quarter high and low sales have been adjusted for the two for one stock-split effective December 14, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------



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The Company has historically paid dividends on an annual basis. Any declaration and payment of dividends
will be based on the Companys earnings, economic conditions, and the evaluation by the Board of Directors of other relevant factors. The Companys ability to pay dividends is dependent on cash dividends paid to it by the Bank and by First
Metro Mortgage Co. The ability of the Bank to pay dividends to the Company is restricted by applicable regulatory requirements. The following table sets forth cash dividends which have been declared and paid by the Company since January 1,
2005:



|               |  |                                      |               
|-------------- |  | ------------------------------------ | --------------
|               |  | Cash Dividends DeclaredPer Share
($)
|Fiscal 2007    |  |                                      |               
|First Quarter  |  | $                                    | .06 per share 
|Second Quarter |  | $                                    | .06 per share 
|Third Quarter  |  | $                                    | .06 per share 
|Fourth Quarter |  | $                                    | .10 per share 
|               | 
|Fiscal 2006    |  |                                      |               
|First Quarter  |  | $                                    | .05 per share 
|Second Quarter |  | $                                    | .05 per share 
|Third Quarter  |  | $                                    | .05 per share 
|Fourth Quarter |  | $                                    | .16 per share 
|               | 
|Fiscal 2005    |  |                                      |               
|First Quarter  |  | $                                    | .045 per share
|Second Quarter |  | $                                    | .045 per share
|Third Quarter  |  | $                                    | .045 per share
|Fourth Quarter |  | $                                    | .11 per share 



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##### Table of Contents

(1) All dividends per share have been adjusted to reflect a two for one stock-split effective
December 14, 2006.

As of February 8, 2008, 14,245,690 shares of common stock were outstanding and held of record by
approximately 589 persons (not including the number of persons or entities holding stock in nominee or street name through various brokerage houses).

The holders of the Companys common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available. Funds for the payment of dividends of the Company are
primarily obtained from dividends paid by the Bank.

There are no shares of the Companys common stock that are subject to outstanding
options or warrants to purchase, or that are convertible into, common equity of the Company.

Unregistered Sales of Equity Securities

In December 2007, the Board of Directors approved the offer of sale of 16,122 shares of the Companys common stock held in
treasury to certain executive officers. The shares were sold at the current fair market price of $13.50, with no discounts. The executive officers purchasing shares were:



|              |  |   |  |              |  |  |  |  |  |  |  |  |  |  |  | 
|------------- |  | - |  | ------------ |  |  |  |  |  |  |  |  |  |  |  | 
|David H. Gill |  | - |  | 8,889 shares |  |  |  |  |  |  |  |  |  |  |  | 
|Ronald Burch  |  | - |  | 833 shares   |  |  |  |  |  |  |  |  |  |  |  | 

The private issuance was exempt from registration with the SEC under its intrastate exemption and
also exempt under the State of Georgias Small Offering exemption.

PERFORMANCE GRAPH

The graph presented below compares the cumulative total stockholder return on Henry County Bancshares, Inc.s common stock to the cumulative total
return of the NASDAQ Composite and the SNL Southeast Bank Index for the five fiscal years, which commenced January 1, 2003 and ended December 31, 2007. The cumulative total stockholder return assumes the investment of $100 in Henry County
Bancshares, Inc.s common stock and in each index on December 31, 2002 and assumes reinvestment of dividends. The NASDAQ Composite Index is a publicly available measure of over 3,000 companies including NASDAQ domestic and international
based common type stocks listed on The Nasdaq Stock Market. The SNL Southeast Bank Index is a compilation of the total stockholder return of all publicly-traded bank holding companies headquartered in the Southeastern United States.

LOGO



|                              |  |               |  |          |  |          |  |          |  |          |  |         
|----------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                              |  | Period Ending
|Index                         |  | 12/31/02      |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07
|Henry County Bancshares, Inc. |  | 100.00        |  | 110.43   |  | 119.68   |  | 136.36   |  | 181.67   |  | 192.51  
|NASDAQ Composite              |  | 100.00        |  | 150.01   |  | 162.89   |  | 165.13   |  | 180.85   |  | 198.60  
|SNL Southeast Bank Index      |  | 100.00        |  | 125.58   |  | 148.92   |  | 152.44   |  | 178.75   |  | 134.65  



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##### Table of Contents

Issuer Purchases of Equity Securities

The following table sets forth the Companys purchases of its common stock during the fourth quarter ended December 31, 2007.

Issuer Purchases of Equity Securities



|           |  |                                              |  |                                        |       |                                                                          |     |                                                                                                                       |    
|---------- |  | -------------------------------------------- |  | -------------------------------------- | ----- | ------------------------------------------------------------------------ | --- | --------------------------------------------------------------------------------------------------------------------- | ---
|           |  | (a)Total numberof shares (or units)Purchased |  | (b)Averageprice paidper share(or unit) |       | (c)Total number ofshares (or units)purchased as part ofplans or programs |     | (d)Maximum number (orapproximate dollar value)of shares (or units) thatmay yet be
purchasedunder the plansor programs
|10/23/2007 |  | 20,250 shares                                |  | $                                      | 13.50 |                                                                          | N/A |                                                                                                                       | N/A
|12/03/2007 |  | 20,250 shares                                |  | $                                      | 13.50 |                                                                          | N/A |                                                                                                                       | N/A
|12/14/2007 |  | 40,500 shares                                |  | $                                      | 13.50 |                                                                          | N/A |                                                                                                                       | N/A

The shares shown above were purchased in single, unsolicited open-market transactions from
individual shareholders. The transactions were not pursuant to a stock repurchase plan.



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##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table
presents selected historical consolidated financial information for us and our subsidiaries and is derived from the consolidated financial statements and related notes included in this annual report. This information is only a summary and should be
read in conjunction with our historical financial statements and related notes. All amounts are in thousands, except per share data.



|                                    |  |                                           |            |      |   |            |  |      |            |      |   |            |  |   |           
|----------------------------------- |  | ----------------------------------------- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                    |  | As of and For the Year Ended December 31,
|                                    |  | 2007                                      |            | 2006 |   | 2005       |  | 2004 |            | 2003
|Total Loans                         |  | $                                         | 569,388    |      | $ | 561,646    |  | $    | 518,114    |      | $ | 486,723    |  | $ | 418,637   
|Total Deposits                      |  |                                           | 625,851    |      |   | 594,873    |  |      | 545,247    |      |   | 470,313    |  |   | 427,033   
|Total Borrowings                    |  |                                           | 13,424     |      |   | 24,222     |  |      | 19,988     |      |   | 42,058     |  |   | 34,835    
|Total Assets                        |  |                                           | 718,996    |      |   | 694,311    |  |      | 631,033    |      |   | 570,528    |  |   | 515,137   
|                                    |  |                                           |            |      |  
|Interest Income                     |  |                                           | 51,547     |      |   | 48,311     |  |      | 36,602     |      |   | 28,685     |  |   | 25,748    
|Interest Expense                    |  |                                           | 26,306     |      |   | 20,498     |  |      | 13,859     |      |   | 10,022     |  |   | 9,429     
|Net Interest Income                 |  |                                           | 25,241     |      |   | 27,813     |  |      | 22,743     |      |   | 18,663     |  |   | 16,319    
|Provision for Loan Losses           |  |                                           | 2,959      |      |   | 477        |  |      | 546        |      |   | 443        |  |   | 472       
|Net Interest Income After Provision |  |                                           | 22,282     |      |   | 27,336     |  |      | 22,197     |      |   | 18,220     |  |   | 15,847    
|Non-Interest Income                 |  |                                           | 3,025      |      |   | 3,296      |  |      | 3,983      |      |   | 4,322      |  |   | 5,531     
|Non-Interest Expense                |  |                                           | 11,763     |      |   | 10,614     |  |      | 10,239     |      |   | 9,548      |  |   | 9,417     
|Income Before Income Taxes          |  |                                           | 13,544     |      |   | 20,018     |  |      | 15,941     |      |   | 12,994     |  |   | 11,961    
|Provision for Income Taxes          |  |                                           | 4,835      |      |   | 7,609      |  |      | 5,665      |      |   | 4,611      |  |   | 4,225     
|Net Income                          |  |                                           | 8,709      |      |   | 12,409     |  |      | 10,276     |      |   | 8,383      |  |   | 7,736     
|                                    |  |                                           |            |      |  
|Net Income Per Share                |  |                                           | .61        |      |   | .87        |  |      | .72        |      |   | .59        |  |   | .54       
|                                    |  |                                           |            |      |  
|Cash Dividends Declared             |  |                                           | 0.28       |      |   | 0.31       |  |      | 0.245      |      |   | 0.205      |  |   | 0.19      
|Book Value Per Share                |  |                                           | 5.30       |      |   | 4.97       |  |      | 4,39       |      |   | 3.93       |  |   | 3.59      
|Weighted Average Shares             |  |                                           | 14,314,171 |      |   | 14,303,517 |  |      | 14,303,368 |      |   | 14,311,557 |  |   | 14,312,676



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QUARTERLY DATA



|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ------------ | - | ------------- |  | ------------ | ------ | ------------- | - | ------ | ------------ | - | ------------- | - | ------------ | - | ------ |  | - | ------ |  | - | ------
|                                                    |  | Years Ended December 31,             
|                                                    |  | 2007                                  |        | 2006        
|                                                    |  | FourthQuarter                         |        | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |        | FourthQuarter |   |        | ThirdQuarter |   | SecondQuarter |   | FirstQuarter
|                                                    |  | (In thousands, except per share data)
|Interest income                                     |  | $                                     | 12,204 |              | $ | 12,840        |  | $            | 13,523 |               | $ | 12,980 |              | $ | 13,171        |   |              | $ | 12,595 |  | $ | 11,667 |  | $ | 10,878
|Interest expense                                    |  |                                       | 6,809  |              |   | 6,792         |  |              | 6,624  |               |   | 6,081  |              |   | 6,032         |   |              |   | 5,432  |  |   | 4,721  |  |   | 4,313 
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|Net interest income                                 |  |                                       | 5,395  |              |   | 6,048         |  |              | 6,899  |               |   | 6,899  |              |   | 7,139         |   |              |   | 7,163  |  |   | 6,946  |  |   | 6,565 
|Provision for loan losses                           |  |                                       | 1,525  |              |   | 1,258         |  |              | 164    |               |   | 12     |              |   | (30           | ) |              |   | 111    |  |   | 250    |  |   | 146   
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|Net interest income after provision for loan losses |  |                                       | 3,870  |              |   | 4,790         |  |              | 6,735  |               |   | 6,887  |              |   | 7,169         |   |              |   | 7,052  |  |   | 6,696  |  |   | 6,419 
|Noninterest income                                  |  |                                       | 690    |              |   | 762           |  |              | 789    |               |   | 784    |              |   | 757           |   |              |   | 790    |  |   | 881    |  |   | 868   
|Noninterest expenses                                |  |                                       | 3,191  |              |   | 2,955         |  |              | 2,857  |               |   | 2,760  |              |   | 2,863         |   |              |   | 2,680  |  |   | 2,621  |  |   | 2,450 
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|Income before income taxes                          |  |                                       | 1,369  |              |   | 2,597         |  |              | 4,667  |               |   | 4,911  |              |   | 5,063         |   |              |   | 5,162  |  |   | 4,956  |  |   | 4,837 
|Provision for income taxes                          |  |                                       | 326    |              |   | 936           |  |              | 1,705  |               |   | 1,868  |              |   | 2,038         |   |              |   | 1,961  |  |   | 1,848  |  |   | 1,762 
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|Net income                                          |  | $                                     | 1,043  |              | $ | 1,661         |  | $            | 2,962  |               | $ | 3,043  |              | $ | 3,025         |   |              | $ | 3,201  |  | $ | 3,108  |  | $ | 3,075 
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       
|Earnings per share                                  |  | $                                     | .07    |              | $ | .12           |  | $            | .21    |               | $ | .21    |              | $ | 0.22          |   |              | $ | 0.22   |  | $ | 0.22   |  | $ | 0.21  
|                                                    |  |                                       |        |              |   |               |  |              |        |               |   |        |              |   |               |   |              |   |        |  |   |        |  |   |       



|ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following is a discussion of our financial condition and the financial condition of our bank subsidiary, The First State Bank and our mortgage subsidiary, First Metro Mortgage Co. at December 31, 2007 and
2006 and the results of operations for the three years in the period ended December 31, 2007. The purpose of this discussion is to focus on information about our financial condition and results of operations that are not otherwise apparent from
our audited financial statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.



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A Warning About Forward-Looking Statements

We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and reports to stockholders. Statements made by us,
other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Forward-looking statements are made based upon managements belief as well as assumptions made by, and
information currently available to, management pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking
statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking
business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and
elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment
of reserves for loan losses, including the value of collateral underlying delinquent loans and other factors. We caution that these factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to
time by us, or on our behalf.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America as defined by the Public Company Accounting Oversight Board and conform to general practices within the
banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements. 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.

We believe the following are critical accounting policies that require the most significant estimates and assumptions that are
particularly susceptible to a significant change in the preparation of our financial statements.

Allowance for loan losses

The allowance for loan losses represents managements estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for
loan losses requires significant judgment and the use of estimates related to the fair market value or the estimated net realizable value of underlying collateral on impaired loans, estimated losses on non-impaired loans based on historical loss
experience, managements evaluation of the current loan portfolio, and consideration of current economic trends and conditions. Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to
the allowance. A provision for loan losses is charged to operations based on managements periodic evaluation of the factors previously mentioned, as well as other pertinent factors.



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The allowance for loan losses consists of specific, general and unallocated components. The components of the allowance
for loan losses represent an estimate pursuant to either Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, or SFAS 114, Accounting by Creditors for Impairment of a Loan.The
allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual problem or potential problem loans and historical loss experience for each loan
category. The specific credit allocations are based on regular analyses of loan relationships typically in excess of $500,000 but may include a review of other loan relationships on which full collection may not be reasonably assumed. These analyses
involve judgment in estimating the amount of loss associated with the specific loans, including estimating the underlying collateral values. The historical loss experience is determined using the average of actual losses incurred over the prior five
years for each type of loan. The historical loss experience is adjusted for known changes in economic conditions as well as other qualitative factors. The resulting loss allocation factors are applied to the balance of each type of loan after
removing the balance of impaired loans from each category. The unallocated component reflects managements estimate of potential inherent but undetected losses within the portfolio due to uncertainties in economic conditions as well as a
component that accounts for the inherent imprecision in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. At December 31, 2007 and 2006, the unallocated component of the allowance
is not significant.

Although management believes its processes for determining the allowance adequately consider all the potential factors that could
potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. In addition there could be potential problem loans in the portfolio that have not been identified as problems because they
continue to perform as set forth in the loan agreements. Continued weaknesses in our market area could cause currently performing credits to deteriorate. To the extent actual outcomes differ from management estimates, additional provision for loan
losses could be required that could adversely affect earnings or financial position in future periods.

Additional information on the Companys loan
portfolio and allowance for loan losses can be found in the sections of Managements Discussion and Analysis titled Risk Elements and Allowance for Loan Losses and in Note 1 to the Consolidated Financial Statements.



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Overview

During the
second half of 2007, we experienced a significant downturn in our local real estate market, as well as the overall metro Atlanta real estate market. As a result, our operating results were below those of 2006 and we anticipate that 2008 will also be
a challenging year for earnings as we continue to see decreased construction and development loan activity. Due to slowing of construction loan activity during the second half of 2007, our loan portfolio experienced modest growth of $7.7 million for
the year, while our deposit growth exceeded $30 million during 2007. We continued to remain the market leader as measured by deposits in Henry County, representing 28% market share as of June 30, 2007. We reported net income of $8,708,726 in
2007 as compared to $12,409,292 in 2006 and $10,275,922 in 2005. As a result of an increase in our average cost of funds, coupled with a 100 basis point drop in the Prime lending rate during the latter part of 2007, our net interest margins
decreased to 3.64% for 2007, compared to 4.31% for 2006. Our net interest margin was also affected by a sharp increase in non-earning assets during the third and fourth quarters of 2007. Our allowance for loan and lease losses are well in excess of
what our historical loss performance would indicate, but our ongoing analysis of the Banks loans, considering the current economic environment and the level of impaired loans, has resulted in an increased allowance for loan losses.

After a consistent pattern of growth in the companys primary trade area over the last few years, we anticipate a significant slowdown of housing sales, along
with a corresponding negative impact on related economic sectors. Indications of this slowdown are apparent in the declining housing sales, as well as the significant drop in housing permits issued by local governments. Credit quality has
become a major concern, with the bank experiencing a significant increase in problem assets. As the housing market has slowed significantly in our trade area, we anticipate that the Company will experience far less overall loan growth than in
past years. As we are not expanding our physical franchise this year, and we do not need significant funding for loan growth, we anticipate modest deposit growth for 2008. Flat or possibly negative growth, coupled with compressed interest
rate margins will drive earnings for 2008.



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##### Table of Contents

Financial Condition at December 31, 2007 and 2006

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



|                                   |  |                        |         |      |   |        
|---------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                   |  | December 31,          
|                                   |  | 2007                   |         | 2006
|                                   |  | (Dollars in Thousands)
|Cash and due from banks            |  | $                      | 16,826  |      | $ | 18,585 
|Interest-bearing deposits in banks |  |                        | 2,732   |      |   | 295    
|Federal funds sold                 |  |                        | 9,500   |      |   | 5,500  
|Securities                         |  |                        | 93,781  |      |   | 91,077 
|Loans held for sale                |  |                        | 950     |      |   | 666    
|Loans, net                         |  |                        | 561,730 |      |   | 556,416
|Premises and equipment             |  |                        | 10,341  |      |   | 9,936  
|Other assets                       |  |                        | 23,136  |      |   | 11,835 
|                                   |  |                        |         |      |   |        
|                                   |  | $                      | 718,996 |      | $ | 694,310
|                                   |  |                        |         |      |   |        
|Total deposits                     |  | $                      | 625,851 |      | $ | 594,873
|Other borrowings                   |  |                        | 13,424  |      |   | 24,222 
|Other liabilities                  |  |                        | 4,187   |      |   | 4,017  
|Stockholders' equity               |  |                        | 75,534  |      |   | 71,198 
|                                   |  |                        |         |      |   |        
|                                   |  | $                      | 718,996 |      | $ | 694,310
|                                   |  |                        |         |      |   |        

As of December 31, 2007, we had total assets of $719 million, an increase of 3.56% over December 31,
2006. Total interest-earning assets were $676 million at December 31, 2007 as compared to $659 million at December 31, 2006 or 94% and 95% of total assets, respectively. Our primary interest-earning assets at December 31, 2007 were
loans, which made up 84% of total interest-earning assets as compared to 83% at December 31, 2006. Increases of $30.9 million in deposits offset by net decreases in other borrowings of $10.8 million and increases of $4.3 million in
shareholders equity were primarily used to fund loan growth of $5.3 million, net of an increase in the reserve for loan losses of $2.4 million. Other assets increased $11.3 million primarily as a result of the transfer of foreclosed real
estate loans to other real estate owned in the amount of $9.9 million. Deposit growth also funded an increase in our investment securities portfolio and federal funds sold of $2.7 million and $4.0 million, respectively. Our total equity increased by
$4.3 million year-to-date as net income of $8.7 million, coupled with an increase in other comprehensive income related to our securities available for sale of $595,032, as well as sales of previously held treasury stock in the amount of $131,347
was offset by dividends paid of $4.0 million, as well as the purchase of treasury stock in the amount of $1.1 million.

The funding component of this
change was accomplished through the continued emphasis on raising core deposits, while lessening our use of alternative funding sources such as brokered certificates of deposit and Federal Home Loan Bank advances. The Company is favorably positioned
for moderate increases in interest rates and will continue to accept opportunity cost in the short term to preserve earnings stability for the long term.

The securities portfolio provides the Company with a source of liquidity and a relatively stable source of income. The Companys investment policy focuses on the use of the securities portfolio to manage the interest rate risk created
by the inherent mismatch of the loan and deposit portfolios. The Companys asset/liability management committee meets quarterly to review economic trends and makes recommendations as to the structure of the securities portfolio based upon this
review and the Companys projected funding needs.



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Our securities portfolio, consisting of U.S. Government and Agency, mortgage-backed, municipal and equity securities
amounted to $93.7 million at December 31, 2007. Unrealized gains on securities available-for-sale were $660,202 at December 31, 2007 as compared to unrealized losses of $241,363 at December 31, 2006. Unrealized losses on securities
held-to-maturity were $21,289 at December 31, 2007 as compared to unrealized losses of $65,176 at December 31, 2006. We have not specifically identified any securities for sale in future periods, which, if so designated, would require a
charge to operations if the market value would not be reasonably expected to recover prior to the time of sale.

Since lending activities generate the
primary source of revenue, the Companys main objective is to adhere to sound lending practices. The Board of Directors has delegated loan policy decisions and loan approval authority to the Executive Committee of the Board of Directors. The
Executive Committee is composed of five outside directors and the Chief Executive Officer. The Executive Committee establishes lending policies that include underwriting guidelines on the various types of loans made as well as guidance on loan
terms. The Company employs a loan approval process in which individual loan officers are provided with independent approval authority based upon their experience and training. When prospective loans are analyzed, both interest rate and credit
quality objectives are considered in determining whether to make a given loan. Parameters are set on the amount of credit that can be extended to one borrower. The largest amount that can generally be extended to any one borrower without obtaining
approval from the Executive Committee of the Board of Directors is $150,000. The Executive Committee is authorized to extend credit to one borrower on an unsecured basis of up to 15% of statutory capital or approximately $7.2 million and on a
secured basis of up to 25% of statutory capital or approximately $12 million.

The Bank offers a variety of loans to retail customers in the communities we
serve.

Consumer Loans:

Consumer loans in general
carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate but less risky than commercial loans. Risk of default is generally determined by the well being of the national and local
economies. During times of economic stress there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk on consumer type loans is generally managed through policy
limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.

Various types of
consumer loans include the following:



| |  |  | Home equity loans - open and closed end
| | - |  | ---------------------------------------



| |  |  | Vehicle financing
| | - |  | -----------------



| |  |  | Loans secured by deposits
| | - |  | -------------------------



| |  |  | Secured and unsecured personal loans
| | - |  | ------------------------------------

The various
types of consumer loans all carry varying degrees of risk for the Bank. Loans secured by deposits carry little or no risk and in our experience have had a zero default rate. Home equity lines carry additional risk because of the increased difficulty
of converting real estate to cash in the event of a default. However,



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underwriting policy provides mitigation to this risk in the form of a maximum loan to value ratio of 90% on a collateral type that has historically
appreciated in value. The Bank also requires the customer to carry adequate insurance coverage to pay all mortgage debt in full if the collateral is destroyed. Vehicle financing carries additional risks over loans secured by real estate in that the
collateral is declining in value over the life of the loan and is mobile. Risks inherent in vehicle financing are managed by matching the loan term with the age and remaining useful life of the collateral to ensure the customer always has an equity
position and is never upside down. Collateral is protected by requiring the customer to carry insurance showing the bank as loss payee. The Bank also has a blanket policy that covers the Bank in the event of a lapse in the
borrowers coverage and also provides assistance in locating collateral when necessary. Secured personal loans carry additional risks over the previous types in that they are generally smaller and made to borrowers with somewhat limited
financial resources and credit histories. These loans are secured by a variety of collateral with varying degrees of marketability in the event of default. Risk on these types of loans is managed primarily at the underwriting level with guidelines
for debt to income ratio limitations and conservative collateral valuations. Unsecured personal loans carry the greatest degree of risk in the consumer portfolio. Without collateral, the Bank is completely dependent on the commitment of the borrower
to repay and the stability of the borrowers income stream. Again, primary risk management occurs at the underwriting stage with guidelines for debt to income ratios, time in present job and in industry and policy guidelines relative to loan
size as a percentage of net worth and liquid assets.

Commercial and Industrial Loans

The Bank makes loans to small and medium sized businesses in our primary trade area for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial
loans are granted to borrowers based on cash flow, ability to repay and degree of management expertise. This type loan may be subject to many different types of risk, which will differ depending on the particular industry the borrower is involved
with. General risks to an industry, or segment of an industry, are monitored by senior management on an ongoing basis, when warranted. Individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed at
a Loan Committee or Board of Directors level. On a regular basis, commercial and industrial borrowers are required to submit statements of financial condition relative to their business to the Bank for review. These statements are analyzed for
trends and the loan is assigned a credit grade accordingly. Based on this grade the loan may receive an increased degree of scrutiny by management up to and including additional loss reserves being required.

This type loan is almost always collateralized. Generally, business assets are used and may consist of general intangibles, inventory, equipment or real estate.
Collateral is subject to risk relative to conversion to a liquid asset if necessary as well as risks associated with degree of specialization, mobility and general collectibility in a default situation. To mitigate this risk to collateral, it is
underwritten to strict standards including valuations and general acceptability based on the Banks ability to monitor its ongoing health and value.

Commercial Real Estate:

The Bank grants loans to borrowers secured by commercial real estate located in our market area. In underwriting
these type loans we consider the historic and projected future cash flows of the real estate, we make an assessment of the physical condition and general location of the property and the effect these factors will have on its future desirability from
a tenant standpoint. We will generally lend up to a maximum 75% loan to value ratio and require a minimum debt coverage ratio of 1.25% or other compensating factors.

Commercial real estate offers some risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to



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maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also commercial
real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these risks, we monitor our loan concentration and loans are audited by a third party auditor. This type loan generally has a shorter maturity than
other loan types giving the Bank an opportunity to reprice, restructure or decline to renew the credit. As with other loans, commercial real estate loans are graded depending upon strength of credit and performance. A lower grade will bring
increased scrutiny by management and the Board of Directors.

Construction and Development Loans:

The Bank makes residential construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with
end buyers already secured. This type loan is subject primarily to market and general economic risk caused by inventory build-up in periods of economic prosperity. During times of economic stress this type loan has typically had a greater degree of
risk than other loan types. To mitigate that risk, the Board of Directors and management reviews the entire portfolio on a monthly basis. The percentage of our portfolio being built on a speculative basis is tracked very closely. On a quarterly
basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current inventory levels in these areas. To further mitigate risk, this type loan is accorded a larger percentage loan loss allowance than other loan
types. Loan policy also provides for limits on speculative lending by borrower and by real estate project.

Loan Participations:

The Bank sells loan participations in the ordinary course of business when an originated loan exceeds its legal lending limit as defined by state banking laws. These loan
participations are sold to other financial institutions without recourse. (As of December 31, 2007 the Bank had $4.07 million in loan participations sold).

The Bank will also purchase loan participations from time to time from other banks in the ordinary course of business usually without recourse. Purchased loan participations are underwritten in accordance with the
Banks loan policy and represent a source of loan growth to the Bank. Although the originating financial institution provides much of the initial underwriting documentation, management is responsible for the appropriate underwriting, approval
and the on-going evaluation of the loan. One risk associated with purchasing loan participations is that the Bank often relies on information provided by the selling bank regarding collateral value and the borrowers capacity to pay. To the
extent this information is not accurate, the Bank may experience a loss on these participations. Otherwise, the Bank believes that the risk related to purchased loan participations is consistent with other similar type loans in the loan portfolio.
If a purchased loan participation defaults, the Bank usually has no recourse against the selling bank but will take other commercially reasonable steps to minimize its loss. (As of December 31, 2007, the Bank had purchased 41 loan
participations. The total principal amount of these participations comprised approximately 5.58% of our total portfolio on December 31, 2007).

Through the Companys mortgage subsidiary, First Metro Mortgage Co., first mortgage loans are originated for immediate sale to investors. The loans are sold with servicing rights attached; therefore, no servicing rights are retained by
the Company. Gains and losses on the sale of loans are recognized at the settlement date and are determined by the difference between the selling price and the carrying value of the loans sold.

All loans originated by First Metro Mortgage Co. are classified as loans held for sale on the balance sheet because of the intention to immediately sell these loans. The
balance of the loans held for sale represents individual mortgage loans that have been funded for which proceeds from, the investor have not yet been



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received. Loans held for sale are carried at the lower of aggregate cost or fair value. However, because the proceeds from the investors for the sale of
these loans are usually received within fourteen days, the aggregate cost and fair value of these loans are the same.

For the year ended December 31,
2007, First Metro Mortgage Co. originated 130 loans totaling $21.7 million. These mortgage banking activities are performed exclusively by First Metro Mortgage Co. No similar activities are conducted at the Bank level. All loans originated by the
Bank are classified as held for investment.

We have 94% of our loan portfolio collateralized by real estate located in our primary market area of Henry
County, Georgia and surrounding counties. Our real estate mortgage portfolio consists of loans collateralized by one to four-family and multifamily residential properties (8%), construction loans to build one to four-family and multifamily
residential properties (60%), and nonresidential properties consisting primarily of small business commercial properties (32%).

Liquidity and Capital
Resources

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.

Our liquidity and capital resources are monitored on a monthly basis by management and periodically by State and Federal regulatory authorities. As determined under
guidelines established by regulatory authorities and internal policy, our liquidity ratio of 15% at December 31, 2007 was considered satisfactory.

At
December 31, 2007, we had loan commitments outstanding of $75 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. If needed, we have the ability on a short-term basis to borrow and purchase federal funds from other financial institutions. We had arrangements with two commercial banks for additional short-term advances of $31.6 million,
of which none had been drawn upon as of December 31, 2007. We also have the ability to borrow up to $112 million, subject to available collateral, from the Federal Home Loan Bank.

At December 31, 2007, our capital ratios were considered adequate based on regulatory minimum capital requirements. Stockholders' equity increased in 2007 by $4.3 million as net income of $8.7 million coupled
with an increase in other comprehensive income related to our securities available-for-sale of $595,032, as well as sales of previously held treasury stock in the amount of $131,347 was offset by dividends paid of $4.0 million, as well as the
purchase of treasury stock in the amount of $1.1 million. For regulatory purposes, the net unrealized gains and losses on securities available-for-sale are excluded in the computation of the capital ratios.

In the future, the primary source of funds available to us will be the payment of dividends by the Bank. Banking regulations limit the amount of the dividends that may
be paid without prior approval of the Banks regulatory agency. At December 31, 2007, the Bank could pay dividends of $4.4 million without regulatory approval.



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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 December 31, 2007 are as follows:



|                           |  |              |   |  |       |   |  |                        |  
|-------------------------- |  | ------------ | - |  | ----- | - |  | ---------------------- | -
|                           |  | Actual       |  
|                           |  | Consolidated |   |  | Bank  |   |  | RegulatoryRequirements |  
|Leverage capital ratio     |  | 9.89         | % |  | 9.85  | % |  | 5.00                   | %
|Risk-based capital ratios: |  |              |   |  |       |   |  |                        |  
|Core capital               |  | 12.13        |   |  | 12.08 |   |  | 6.00                   |  
|Total capital              |  | 13.37        |   |  | 13.32 |   |  | 10.00                  |  

These ratios may decline as asset growth continues, but are expected to exceed the regulatory minimum requirements
to be considered well-capitalized. Anticipated future earnings will assist in keeping these ratios at satisfactory levels above the regulatory minimum requirement to be considered well-capitalized.

We believe that our liquidity and capital resources are adequate and will meet our foreseeable short and long-term needs. We anticipate that we will have sufficient
funds available to meet current loan commitments and to fund or refinance, on a timely basis, our other material commitments and liabilities.

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

Effects of Inflation

The impact of inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets that are
primarily monetary in nature and that tend to fluctuate in concert with inflation. A bank can reduce the impact of inflation if it can manage its rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate
sensitive liabilities. We, through our asset-liability committee, attempt to structure the assets and liabilities and manage the rate sensitivity gap, thereby seeking to minimize the potential effects of inflation. For information on the management
of the Banks interest rate sensitive assets and liabilities, see the Asset/Liability Management section.

We do not engage in any
transactions or have relationships or other arrangements with an unconsolidated entity. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not trade in energy, weather or other commodity based
contracts.



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Results of Operations For The Years Ended December 31, 2007, 2006 and 2005

The following is a summary of our operations for the years indicated.



|                          |  |                          |        |      |   |        |  |   |       
|------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                          |  | Years Ended December 31,
|                          |  | 2007                     |        | 2006 |   | 2005  
|                          |  | (Dollars in Thousands)  
|Interest income           |  | $                        | 51,547 |      | $ | 48,311 |  | $ | 36,602
|Interest expense          |  |                          | 26,306 |      |   | 20,498 |  |   | 13,859
|                          |  |                          |        |      |   |        |  |   |       
|Net interest income       |  |                          | 25,241 |      |   | 27,813 |  |   | 22,743
|Provision for loan losses |  |                          | 2,959  |      |   | 477    |  |   | 546   
|Other income              |  |                          | 3,025  |      |   | 3,296  |  |   | 3,983 
|Other expenses            |  |                          | 11,763 |      |   | 10,614 |  |   | 10,239
|                          |  |                          |        |      |   |        |  |   |       
|Pretax income             |  |                          | 13,544 |      |   | 20,018 |  |   | 15,941
|Income taxes              |  |                          | 4,835  |      |   | 7,609  |  |   | 5,665 
|                          |  |                          |        |      |   |        |  |   |       
|Net income                |  | $                        | 8,709  |      | $ | 12,409 |  | $ | 10,276
|                          |  |                          |        |      |   |        |  |   |       

Net Interest Income

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

The net yield on average interest-earning assets decreased to 3.64% in 2007 from 4.31% in 2006. The average yield
on interest-earning assets decreased to 7.42% in 2007 from 7.50 % in 2006. The average yield on interest-bearing liabilities increased to 4.59% in 2007 from 3.95 % in 2006. As a result of a 100 basis point decrease in the Prime lending
rate during the third quarter of 2007, coupled with an increase in our cost of funds during 2007, our net interest margin decreased during 2007.

The net
yield on average interest-earning assets increased to 4.31% in 2006 from 3.90% in 2005. The average yield on interest-earning assets increased to 7.50% in 2006 from 6.27% in 2005. The average yield on interest-bearing liabilities increased to 3.95%
in 2006 from 3.05% in 2005.

Net interest income decreased by $2.5 million in 2007 as compared to an increase of $5.1 million in 2006 and an increase of
$4.1 million in 2005 compared to 2004. The decrease in 2007 was attributed to an overall increase in our cost of funds primarily in the first nine months of 2007, coupled with a decrease in average rates earned on our interest earning assets during
the fourth quarter of 2007, and to a lesser extent the increase in loans placed on nonaccrual during the third and fourth quarters of 2007.

Provision
for Loan Losses

The provision for loan losses increased by $2,482,394 to $2,959,254 in 2007 and decreased by $69,290 to $476,860 in 2006. The amounts
provided are due primarily to our assessment of the inherent risk in the loan portfolio. Please see the section titled Allowance for Loan Losses for a more detailed explanation of our assessment criteria as it relates to providing for
loan losses. We believe that the $7.6 million in the allowance



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for loan losses at December 31, 2007, or 1.34% of total net outstanding loans and the $5.2 million in the allowance for loan losses at December 31,
2006, or .93% of total net outstanding loans, are adequate at their respective dates to absorb known risks in the portfolio based upon our historical experience. Our net charge-offs were minimal in 2007, 2006 and 2005 as the ratio of charged-off
loans to average loans outstanding was .09%, .04% and .01%, respectively. No assurance can be given, however, that increased loan volume, and adverse economic conditions or other circumstances will not result in increased losses in our loan
portfolio.

Other Income

Other income consists of
service charges on deposit accounts, other service charges and fees and mortgage banking income. Other income was $3.0 million in 2007 as compared to $3.3 million in 2006. The decrease is due primarily to decreased service charges on demand deposit
accounts of $138,000, as well as decreases in mortgage banking income of $103,000, and to a lesser extent, other service charges and fees of $29,000. Decreases in service charges on demand deposit accounts are attributed to decreases in overdraft
fees of $64,000 and decreases in fees charged on service charge demand deposit and club accounts of $92,000, offset by an increase in internet banking fees of $21,000. The decrease in mortgage banking income is attributed to a lesser volume of
mortgage originations during 2007 compared to 2006.

Other income was $3.3 million in 2006 as compared to $4.0 million in 2005. The decrease is due
primarily to decreased service charges on deposit accounts of $416,000, as well as decreases in mortgage banking income of $348,000. Decreases in service charges on deposit accounts are attributed to decreases in overdraft fees of $157,000 and
decreases in fees charged on service charge demand deposit and club accounts of $137,000 and $113,000, respectively. The decrease in mortgage banking income is attributed to a lesser volume of mortgage originations as well as fewer re-financings
during 2006 compared to 2005.

Other Expenses

Other
expenses were $11.8 million in 2007 as compared to $10.6 million in 2006, an increase of $1,148,804. Gross salaries and employee benefits increased by $712,344, primarily as a result of normal salary, incentive and benefits increases of $363,962,
coupled with decreases in capitalized loan fees in the amount of $348,382. The number of full time equivalent employees was 151 at December 31, 2007 as compared to 144 at December 31, 2006. Our equipment and occupancy expenses increased by
$187,456 in 2007 as compared to 2006, primarily as a result of increased building and fixture depreciation expenses of $65,002 and other occupancy expenses attributed to the opening of our Bethany Road branch in March of 2007. Other operating
expenses increased by $249,004 as result of increases in stationery and supplies of $34,240, internet expenses of $31,854, ATM expenses of $48,737 and increased expenses attributed to other real estate owned of $140,969.

The increase in other expenses to $10.6 million in 2006 from $10.2 million in 2005 was due to increased salary and employee benefits of $308,261, primarily as a result
of normal salary and incentive increases of $284,000. Equipment and occupancy expenses increased by $49,612, as a result of increased depreciation expense on computer equipment. Other operating expenses increased by only $16,715 as there was no
significant increase in individual other operating expense accounts.



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Income Tax

Income
tax expense was $4.8 million in 2007 as compared to $7.6 million in 2006. The decrease is primarily due to lower pretax income. Income tax expense as a percentage of pretax income was 36% for December 31, 2007 and 38% for December 31,
2006.

The increase in income tax expense to $7.6 million in 2006 from $5.6 million in 2005 was due to higher pretax income. Income tax as a percentage of
pretax income was 38% in 2006 and 36% in 2005.



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##### Table of Contents

SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA

The tables and schedules on the following pages set forth certain financial information and statistical data with respect to: the distribution of assets, liabilities and
stockholders' equity; interest rates and interest differentials; interest rate sensitivity gap ratios; the securities portfolio; the loan portfolio including types of loans, maturities and sensitivities to changes in interest rates and information
on nonperforming loans; summary of the loan loss experience and allowance for loan losses; types of deposits; and the return on equity and assets.

The
following table sets forth the amount of our interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest yield/rate for total interest-earning assets and total
interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.



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Table 1 - Distribution of Assets, Liabilities and Stockholders Equity

Interest Rates and Interest Differentials



|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|-------------------------------------------- |  | ------------------------ | ------- | - | -------------- | - | ------------ | ---- | ---- | ------------------ |  | - | -------------- | - | ------------ | - | ------ | ------------------ | ---- | - | -------------- | - | ------------ | - |  | - | ------ |  | ---- | -
|                                             |  | Years Ended December 31, |        
|                                             |  | 2007                     |         |   | 2006           |   |              | 2005 |     
|                                             |  | AverageBalances(1)       |         |   | Income/Expense |   | Yields/Rates |      |      | AverageBalances(1) |  |   | Income/Expense |   | Yields/Rates |   |        | AverageBalances(1) |      |   | Income/Expense |   | Yields/Rates |  
|                                             |  | (Dollars in Thousands)   |        
|Taxable securities                           |  | $                        | 99,206  |   |                | $ | 5,255        |      | 5.30 | %                  |  | $ | 71,923         |   |              | $ | 3,077  |                    | 4.28 | % |                | $ | 52,793       |   |  | $ | 1,639  |  | 3.10 | %
|Nontaxable securities (4)                    |  |                          | 10,038  |   |                |   | 378          |      | 3.77 | %                  |  |   | 8,666          |   |              |   | 332    |                    | 3.83 | % |                |   | 5,677        |   |  |   | 226    |  | 3.98 | %
|Federal funds sold                           |  |                          | 21,641  |   |                |   | 1,082        |      | 5.00 | %                  |  |   | 15,492         |   |              |   | 780    |                    | 5.03 | % |                |   | 13,895       |   |  |   | 495    |  | 3.56 | %
|Interest-bearing deposits in banks           |  |                          | 1,472   |   |                |   | 74           |      | 5.03 | %                  |  |   | 227            |   |              |   | 14     |                    | 6.17 | % |                |   | 521          |   |  |   | 15     |  | 2.88 | %
|Loans (2) (3)                                |  |                          | 562,478 |   |                |   | 44,758       |      | 7.96 | %                  |  |   | 548,046        |   |              |   | 44,109 |                    | 8.05 | % |                |   | 510,733      |   |  |   | 34,226 |  | 6.70 | %
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Total interest-earning assets                |  |                          | 694,835 |   |                |   | 51,547       |      | 7.42 | %                  |  |   | 644,354        |   |              |   | 48,312 |                    | 7.50 | % |                |   | 583,619      |   |  |   | 36,601 |  | 6.27 | %
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Unrealized (losses) on securities            |  |                          | (139    | ) |                |   |              |      |      |                    |  |   | (607           | ) |              |   |        |                    |      |   |                |   | (426         | ) |  |   |        |  |      |  
|Allowance for loan losses                    |  |                          | (5,424  | ) |                |   |              |      |      |                    |  |   | (5,194         | ) |              |   |        |                    |      |   |                |   | (4,782       | ) |  |   |        |  |      |  
|Cash and due from banks                      |  |                          | 15,669  |   |                |   |              |      |      |                    |  |   | 17,462         |   |              |   |        |                    |      |   |                |   | 19,822       |   |  |   |        |  |      |  
|Other assets                                 |  |                          | 26,533  |   |                |   |              |      |      |                    |  |   | 20,054         |   |              |   |        |                    |      |   |                |   | 17,934       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Total                                        |  | $                        | 731,474 |   |                |   |              |      |      |                    |  | $ | 676,069        |   |              |   |        |                    |      |   |                | $ | 616,167      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Interest-bearing demand & savings            |  | $                        | 154,108 |   |                |   | 4,262        |      | 2.77 | %                  |  | $ | 163,912        |   |              |   | 4,328  |                    | 2.64 | % |                | $ | 153,669      |   |  |   | 3,204  |  | 2.09 | %
|Time deposits                                |  |                          | 400,165 |   |                |   | 21,073       |      | 5.27 | %                  |  |   | 332,730        |   |              |   | 15,029 |                    | 4.52 | % |                |   | 278,152      |   |  |   | 9,609  |  | 3.45 | %
|Borrowings                                   |  |                          | 19,012  |   |                |   | 971          |      | 5.11 | %                  |  |   | 22,379         |   |              |   | 1,141  |                    | 5.10 | % |                |   | 22,759       |   |  |   | 1,046  |  | 4.60 | %
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Total interest-bearing liabilities           |  |                          | 573,285 |   |                |   | 26,306       |      | 4.59 | %                  |  |   | 519,021        |   |              |   | 20,498 |                    | 3.95 | % |                |   | 454,580      |   |  |   | 13,859 |  | 3.05 | %
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Noninterest-bearing demand                   |  |                          | 76,857  |   |                |   |              |      |      |                    |  |   | 83,922         |   |              |   |        |                    |      |   |                |   | 97,100       |   |  |   |        |  |      |  
|Other liabilities                            |  |                          | 5,798   |   |                |   |              |      |      |                    |  |   | 5,088          |   |              |   |        |                    |      |   |                |   | 4,484        |   |  |   |        |  |      |  
|Stockholders equity                         |  |                          | 75,534  |   |                |   |              |      |      |                    |  |   | 68,038         |   |              |   |        |                    |      |   |                |   | 60,003       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Total                                        |  | $                        | 731,474 |   |                |   |              |      |      |                    |  | $ | 676,069        |   |              |   |        |                    |      |   |                | $ | 616,167      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Net interest income                          |  |                          |         |   |                | $ | 25,241       |      |      |                    |  |   |                |   |              | $ | 27,814 |                    |      |   |                |   |              |   |  | $ | 22,742 |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Net interest spread                          |  |                          |         |   |                |   |              |      | 2.83 | %                  |  |   |                |   |              |   |        |                    | 3.54 | % |                |   |              |   |  |   |        |  | 3.22 | %
|Net yield on average interest-earning assets |  |                          |         |   |                |   |              |      | 3.64 | %                  |  |   |                |   |              |   |        |                    | 4.31 | % |                |   |              |   |  |   |        |  | 3.90 | %



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------

|(2) | Average balances of loans include nonaccrual loans.
|--- | ---------------------------------------------------

|(3) | Interest and fees on loans include $208,000, $220,000, and $223,000 of loan fee income for the years ended December 31, 2007, 2006, and 2005, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Yields on nontaxable securities are not presented on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------

Table 2 - Rate and Volume Analysis

The following table describes the extent to which changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income
and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.



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|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------------------------- | ----- | - | ----------------------------------- | - | ------ | --- |  | - | ------ | - |  | ---- | ----- | - | --- | - | ----- | - |  | - | ------ | -
|                                                                  |  | Years Ended December 31,            |      
|                                                                  |  | 2007 to 2006                        |       |   | 2006 to 2005                        |  
|                                                                  |  | Increase (decrease) due tochange in |       |   | Increase (decrease) due tochange in |  
|                                                                  |  | Volume                              |       |   | Rate                                |   |        | Net |  |   | Volume |   |  | Rate |       |   | Net |  
|                                                                  |  | (Dollars in Thousands)              |      
|Income from interest-earning assets:                              |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Interest and fees on loans                                        |  | $                                   | 1,153 |   |                                     | $ | (474   | )   |  | $ | 649    |   |  | $    | 2,634 |   |     | $ | 7,249 |   |  | $ | 9,883  |  
|Interest on taxable securities                                    |  |                                     | 1,338 |   |                                     |   | 840    |     |  |   | 2,178  |   |  |      | 704   |   |     |   | 734   |   |  |   | 1,438  |  
|Interest on nontaxable securities                                 |  |                                     | 52    |   |                                     |   | (6     | )   |  |   | 46     |   |  |      | 115   |   |     |   | (9    | ) |  |   | 106    |  
|Interest on federal funds sold                                    |  |                                     | 307   |   |                                     |   | (5     | )   |  |   | 302    |   |  |      | 62    |   |     |   | 223   |   |  |   | 285    |  
|Interest on interest-bearing deposits in banks                    |  |                                     | 64    |   |                                     |   | (4     | )   |  |   | 60     |   |  |      | (11   | ) |     |   | 10    |   |  |   | (1     | )
|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Total interest income                                             |  |                                     | 2,914 |   |                                     |   | 351    |     |  |   | 3,265  |   |  |      | 3,504 |   |     |   | 8,207 |   |  |   | 11,711 |  
|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Expense from interest-bearing liabilities:                        |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Interest on interest-bearing demand deposits and savings deposits |  |                                     | (265  | ) |                                     |   | 199    |     |  |   | (66    | ) |  |      | 228   |   |     |   | 896   |   |  |   | 1,124  |  
|Interest on time deposits                                         |  |                                     | 3,324 |   |                                     |   | 2,720  |     |  |   | 6,044  |   |  |      | 2,111 |   |     |   | 3,309 |   |  |   | 5,420  |  
|Interest on borrowings                                            |  |                                     | (172  | ) |                                     |   | 2      |     |  |   | (170   | ) |  |      | (17   | ) |     |   | 112   |   |  |   | 95     |  
|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Total interest expense                                            |  |                                     | 2,887 |   |                                     |   | 2,921  |     |  |   | 5,808  |   |  |      | 2,322 |   |     |   | 4,317 |   |  |   | 6,639  |  
|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  
|Net interest income                                               |  | $                                   | 27    |   |                                     | $ | (2,570 | )   |  | $ | (2,573 | ) |  | $    | 1,182 |   |     | $ | 3,890 |   |  | $ | 5,072  |  
|                                                                  |  |                                     |       |   |                                     |   |        |     |  |   |        |   |  |      |       |   |     |   |       |   |  |   |        |  

Asset/Liability Management

Our asset/liability mix is monitored on a regular basis and a report evaluating the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to the Board of Directors on a
quarterly basis. The objective of this policy is to monitor interest rate sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest
rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive
liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally
flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.



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A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs
associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although
certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and
floors) that limit the amount of changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts
also may decrease during periods of rising interest rates.

Changes in interest rates also affect our liquidity position. We currently
price deposits in response to market rates and it is management's intention to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

At December 31, 2007 our cumulative one year interest rate sensitivity gap ratio was 96%. Our targeted ratio is 80% to 120% in this
time horizon. This indicates that our interest-earning assets will reprice during this period at a rate slightly less than our interest-bearing liabilities.

The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2007, the interest rate sensitivity gap (i.e., interest rate
sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio.

The table also sets forth the time periods in which interest-earning assets and
interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of
various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within
such period and at different rates.



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|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | ----------------------------------- | - | -------- | --------------------------------- |  | --------------- | ------- | ----- | - | ------- |  | - | -------
|                                               |  | WithinThreeMonths      |         | After ThreeMonths ButWithin OneYear |   |          | After OneYear ButWithinFive Years |  | After FiveYears |         | Total
|                                               |  | (Dollars in Thousands)
|Interest-earning assets:                       |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing deposits in banks             |  | $                      | 2,732   |                                     | $ |         |                                   |  | $               |        |       | $ |        |  | $ | 2,732  
|Federal funds sold                             |  |                        | 9,500   |                                     |   |         |                                   |  |                 |        |       |   |        |  |   | 9,500  
|Securities                                     |  |                        | 1,255   |                                     |   | 5,373    |                                   |  |                 | 46,185  |       |   | 38,409  |  |   | 91,222 
|Loans                                          |  |                        | 423,105 |                                     |   | 39,872   |                                   |  |                 | 103,980 |       |   | 3,381   |  |   | 570,338
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Total interest-earning assets                  |  |                        | 436,592 |                                     |   | 45,245   |                                   |  |                 | 150,165 |       |   | 41,790  |  |   | 673,792
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing liabilities:                  |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing demand and savings            |  | $                      | 148,156 |                                     | $ |         |                                   |  | $               |        |       | $ |        |  | $ | 148,156
|Time deposits                                  |  |                        | 63,125  |                                     |   | 282,741  |                                   |  |                 | 60,441  |       |   |        |  |   | 406,307
|Repurchase agreements                          |  |                        | 5,000   |                                     |   |         |                                   |  |                 |        |       |   |        |  |   | 5,000  
|Other borrowings                               |  |                        | 5,353   |                                     |   |         |                                   |  |                 | 3,071   |       |   |        |  |   | 8,424  
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Total interest-bearing liabilities             |  | $                      | 221,634 |                                     | $ | 282,741  |                                   |  | $               | 63,512  |       | $ |        |  | $ | 567,887
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Interest rate sensitivity gap                  |  | $                      | 214,958 |                                     | $ | (237,496 | )                                 |  | $               | 86,653  |       | $ | 41,790  |  | $ | 105,905
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap       |  | $                      | 214,958 |                                     | $ | (22,538  | )                                 |  | $               | 64,115  |       | $ | 105,905 |  |   |        
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Interest rate sensitivity gap ratio            |  |                        | 1.97    |                                     |   | .16      |                                   |  |                 | 2.36    |       |   | 0.00    |  |   |        
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap ratio |  |                        | 1.97    |                                     |   | .96      |                                   |  |                 | 1.11    |       |   | 1.19    |  |   |        
|                                               |  |                        |         |                                     |   |          |                                   |  |                 |         |       |   |         |  |   |        

We actively manage the mix of asset and
liability maturities to control the effects of changes in the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on us due to the rate
variability and short-term maturities of our earning assets. In particular, approximately 70% of the loan portfolio is comprised of loans that have variable rate terms or mature within one year. Most mortgage loans are made on a variable rate basis
with rates being adjusted every one to five years.



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INVESTMENT PORTFOLIO

Types of Investments

The carrying amounts of securities at the dates indicated are summarized as follows:



|                              |  |                        |        |      |   |        |  |   |       
|----------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | ------
|                              |  | December 31,          
|                              |  | 2007                   |        | 2006 |   | 2005  
|                              |  | (Dollars in Thousands)
|U.S. Treasury securities      |  | $                      |       |      | $ |       |  | $ | 996   
|Government-sponsored agencies |  |                        | 58,414 |      |   | 71,262 |  |   | 59,196
|Mortgage-backed securities    |  |                        | 24,723 |      |   | 7,947  |  |   | 4,886 
|Municipal securities          |  |                        | 8,745  |      |   | 9,498  |  |   | 5,567 
|                              |  |                        |        |      |   |        |  |   |       
|                              |  |                        | 91,882 |      |   | 88,707 |  |   | 70,645
|Equity securities             |  |                        | 1,898  |      |   | 2,370  |  |   | 2,057 
|                              |  |                        |        |      |   |        |  |   |       
|                              |  | $                      | 93,780 |      | $ | 91,077 |  | $ | 72,702
|                              |  |                        |        |      |   |        |  |   |       

Maturities

The amounts of debt securities, including the weighted average yield in each category as of December 31, 2007 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after
one through five years, (3) after five through ten years and (4) after ten years. Equity securities are not included in the table because they have no contractual maturity.



|                              |  |                  |       |           |                             |   |        |                             |           |  |      |        |  |           |        |  |      |  
|----------------------------- |  | ---------------- | ----- | --------- | --------------------------- | - | ------ | --------------------------- | --------- |  | ---- | ------ |  | --------- | ------ |  | ---- | -
|                              |  | One year or less |       |           | After onethrough five years |   |        | After fivethrough ten years |          
|                              |  | Amount           |       | Yield (1) |                             |   | Amount |                             | Yield (1) |  |      | Amount |  | Yield (1) |       
|Government-sponsored agencies |  | $                | 6,045 |           | 4.97                        | % |        | $                           | 38,801    |  | 5.16 | %      |  | $         | 13,568 |  | 5.45 | %
|Mortgage-backed securities    |  |                  | 151   |           | 3.79                        |   |        |                             | 147       |  | 4.88 |        |  |           | 5,157  |  | 5.45 |  
|Municipal securities          |  |                  | 454   |           | 3.95                        |   |        |                             | 7,468     |  | 3.68 |        |  |           | 288    |  | 5.20 |  
|                              |  |                  |       |           |                             |   |        |                             |           |  |      |        |  |           |        |  |      |  
|                              |  | $                | 6,650 |           | 4.88                        |   |        | $                           | 46,416    |  | 4.93 |        |  | $         | 19,013 |  | 5.44 |  
|                              |  |                  |       |           |                             |   |        |                             |           |  |      |        |  |           |        |  |      |  



|                              |  |                 |        |           |       |   |        |   |           |  |      |  
|----------------------------- |  | --------------- | ------ | --------- | ----- | - | ------ | - | --------- |  | ---- | -
|                              |  | After ten years |        |           | Total |  
|                              |  | Amount          |        | Yield (1) |       |   | Amount |   | Yield (1) | 
|Government-sponsored agencies |  | $               |       |           |      | % |        | $ | 58,414    |  | 5.21 | %
|Mortgage-backed securities    |  |                 | 19,268 |           | 5.35  |   |        |   | 24,723    |  | 5.36 |  
|Municipal securities          |  |                 | 535    |           | 5.41  |   |        |   | 8,745     |  | 3.85 |  
|                              |  |                 |        |           |       |   |        |   |           |  |      |  
|                              |  | $               | 19,803 |           | 5.35  |   |        | $ | 91,882    |  | 5.12 |  
|                              |  |                 |        |           |       |   |        |   |           |  |      |  



|(1) | The weighted average yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of
each security.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The weighted average yields for municipal securities are not stated on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------------------------



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LOAN PORTFOLIO

Types of Loans

Loans by type of collateral are presented below:



|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                               |  | December 31,           |        
|                               |  | 2007                   |         |   | 2006 |   |         | 2005 |  |   | 2004    |   |  | 2003 |        
|                               |  | (Dollars in Thousands) |        
|Commercial                     |  | $                      | 23,752  |   |      | $ | 32,765  |      |  | $ | 36,349  |   |  | $    | 47,246  |   |  | $ | 55,075  |  
|Real estateconstruction       |  |                        | 325,151 |   |      |   | 309,565 |      |  |   | 260,912 |   |  |      | 223,907 |   |  |   | 156,821 |  
|Real estate  mortgage         |  |                        | 212,786 |   |      |   | 210,368 |      |  |   | 210,366 |   |  |      | 203,598 |   |  |   | 191,944 |  
|Consumer installment and other |  |                        | 7,698   |   |      |   | 8,948   |      |  |   | 10,487  |   |  |      | 11,972  |   |  |   | 14,797  |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                               |  |                        | 569,387 |   |      |   | 561,646 |      |  |   | 518,114 |   |  |      | 486,723 |   |  |   | 418,637 |  
|Less allowance for loan losses |  |                        | (7,657  | ) |      |   | (5,230  | )    |  |   | (4,972  | ) |  |      | (4,489  | ) |  |   | (4,178  | )
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans                      |  | $                      | 561,730 |   |      | $ | 556,416 |      |  | $ | 513,142 |   |  | $    | 482,234 |   |  | $ | 414,459 |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

Maturities and Sensitivities to Changes in Interest Rates

Total loans as of December 31, 2007 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one
year through five years, and (3) after five years.



|                             |  |                        |        
|---------------------------- |  | ---------------------- | -------
|                             |  | (Dollars in Thousands)
|Commercial                   |  |                        |        
|One year or less             |  | $                      | 2,311  
|After one through five years |  |                        | 19,968 
|After five years             |  |                        | 1,473  
|                             |  |                        |        
|                             |  |                        | 23,752 
|                             |  |                        |        
|Construction                 |  |                        |        
|One year or less             |  |                        | 73,373 
|After one through five years |  |                        | 251,778
|After five years             |  |                        | 0      
|                             |  |                        |        
|                             |  |                        | 325,151
|                             |  |                        |        
|Other                        |  |                        |        
|One year or less             |  |                        | 13,178 
|After one through five years |  |                        | 172,651
|After five years             |  |                        | 34,655 
|                             |  |                        |        
|                             |  |                        | 220,484
|                             |  |                        |        
|                             |  | $                      | 569,387
|                             |  |                        |        



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The following table summarizes loans at December 31, 2007 with the due dates after one year for predetermined and
floating or adjustable interest rates.



|                                      |  |                       |        
|------------------------------------- |  | --------------------- | -------
|                                      |  | (Dollars inThousands)
|Predetermined interest rates          |  | $                     | 151,343
|Floating or adjustable interest rates |  |                       | 329,182
|                                      |  |                       |        
|                                      |  | $                     | 480,525
|                                      |  |                       |        

Risk Elements

The following table presents the aggregate of nonperforming assets for the categories indicated.



|                                                                                                         |  |                        |        |      |   |       |  |      |       |      |   |       |  |   |      
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                                                                         |  | December 31,          
|                                                                                                         |  | 2007                   |        | 2006 |   | 2005  |  | 2004 |       | 2003
|                                                                                                         |  | (Dollars in Thousands)
|Loans accounted for on a nonaccrual basis                                                                |  | $                      | 32,744 |      | $ | 416   |  | $    | 782   |      | $ | 498   |  | $ | 346  
|                                                                                                         |  |                        |        |      |  
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 4,714  |      |   | 1,001 |  |      | 4,173 |      |   | 3,251 |  |   | 1,654
|                                                                                                         |  |                        |        |      |  
|Restructured loans                                                                                       |  |                        |       |      |   |      |  |      |      |      |   |      |  |   |     
|                                                                                                         |  |                        |        |      |   |       |  |      |       |      |   |       |  |   |      
|Total nonperforming loans                                                                                |  | $                      | 37,458 |      | $ | 1,417 |  | $    | 4,955 |      | $ | 3,749 |  | $ | 2,000
|                                                                                                         |  |                        |        |      |  
|Other real estate                                                                                        |  |                        | 10,394 |      |   | 1,411 |  |      | 194   |      |   | 5     |  |   | 8    
|                                                                                                         |  |                        |        |      |   |       |  |      |       |      |   |       |  |   |      
|Total non performing assets                                                                              |  | $                      | 47,852 |      | $ | 2,828 |  | $    | 5,149 |      | $ | 3,754 |  | $ | 2,008
|                                                                                                         |  |                        |        |      |   |       |  |      |       |      |   |       |  |   |      

The reduction in interest income associated with nonaccrual loans during 2007 is as follows:



|                                                                                       |  |                       |      
|-------------------------------------------------------------------------------------- |  | --------------------- | -----
|                                                                                       |  | (Dollars inThousands)
|Interest income that would have been recorded on nonaccrual loans under original terms |  | $                     | 1,947
|                                                                                       |  |                       |      
|                                                                                       | 
|Interest income that was recorded on nonaccrual loans                                  |  | $                     | 25   
|                                                                                       |  |                       |      

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

Nonperforming assets at December 31, 2007 amounted to approximately $47.8 million, or 8.25% of total loans and other real estate. This compares to
approximately $2.8 million, or .50% of total loans and other real estate at December 31, 2006 and $5.1 million, or .99% of total loans and other real estate at December 31, 2005.

The increase in nonperforming assets is primarily attributed to increases in nonaccrual loans and other real estate. The majority of nonaccrual loans are represented by
approximately eighteen separate loan relationships involving construction loans and residential development loans located in our local trade area and these loans comprise over 98% of the $32.7 million in loans placed on nonaccrual during the third
and fourth quarters of 2007. Of these relationships, eleven are comprised of $13.0 million in loans secured by detached homes in



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various stages of completion, two relationships are comprised of $3.0 million in loans secured by various residential building lots, and two relationships
are comprised of $4.5 million in development loans comprising whole residential lot subdivisions that have been completed. We also had several relationships in our nonperforming asset totals comprising residential development loans in which the
development had not been completed as of December 31, 2007.

The Company has performed an extensive analysis of these loans and the underlying
collateral values and has made additional provisions to the allowance for loan losses totaling $2.8 million during the third and fourth quarters of 2007. In addition, subsequent to the end of the year, the Bank was notified of the bankruptcy filing
of a borrower with a significant relationship. The company has incorporated this relationship into the year-end non-performing assets and believes that it has appropriate reserves to protect against future additional loss. The change in status of
all of these loans placed on nonaccrual is primarily related to the borrowers illiquidity, as well as increased levels of lot and completed home inventories in our market as discussed below.

The increase in other real estate is primarily attributed to the foreclosure of a development loan during the third quarter of 2007 in the amount of $7.7 million,
comprising 145 developed lots and 88 undeveloped lots. The Company has entered into sales discussions with several potential purchasers of this property and is hopeful that it can realize full value of the property. There is not a sale pending on
this property at the time of this writing.

The Companys primary trade area is Henry County, Georgia and those portions of adjoining counties that
are natural extensions of Henry County communities. Henry County has been a rapidly growing county, consistently in the top 10 counties in the nation for growth. Consistent with the Atlanta metropolitan area, the growth of the community was the
basis for a significant portion of the Companys loan portfolio. While home sales began slowing in early 2007, the sales activity dramatically slowed in the third and fourth quarters. While the subsidiary bank did not engage in sub-prime
mortgage lending, either as a direct investor or as a holder of securities, it has not been immune to its impact. A number of the Banks loan customers are involved in the development of residential housing lots or the construction for resale
of residential housing units. The absorption rate of houses and lots supported a significant buildup of inventory of houses for sale as well as a constant supply of lots for future home construction. The significant downturn in home sales, in large
part due to the loss of many financing opportunities for purchasers, has exacerbated the cash flow problems of individual borrowers. Experienced developers and builders found themselves with inventories of homes and lots being exposed to a market
that was no longer able to absorb these properties in a time frame consistent with the production of inventory. Those properties generally require sales concessions or buyer incentives in order to sell. The sudden change in absorption patterns has
left many borrowers with standing inventories that require significant levels of cash requirements to support the carrying cost of servicing their debt. Unfortunately this comes at a time when many of their assets are held in relatively illiquid
form. As a result of this, the Company has seen a sudden spike of loans upon which the borrower does not have the current ability to meet the obligations of the loan upon the pre-established terms.

The Company is concerned with the significant increase in nonperforming assets at December 31, 2007, although we are of the opinion that our long term relationships
with these customers, familiarity with our local real estate markets and adequate collateral positions in these loans will help minimize any losses that may arise as we continue to work with these relationships going forward. The Company recognizes
the possibility there may remain loans in the portfolio that have not been identified as problems due solely to the fact that they have not yet reached an interest payment date or maturity, upon which failure to perform would constitute a default.

We believe that the performance problems existing in our real estate portfolio are a direct result of softening real estate activity and not indicative of
a weakness in previous or current underwriting standards regarding real estate lending.



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The Company is actively working with non-performing borrowers to develop plans for repayment and a program to liquidate
the underlying properties through sales. Alternatively the Company will provide opportunities to restructure the debt if it can be done in a sound manner that will provide the borrower appropriate time to weather this period while protecting the
Bank against further loss or deterioration of collateral values.



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SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes average loan balances for each year determined using the daily average balances during the year; changes in the allowance
for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to expense; and the ratio of net charge-offs during the year to average loans.



|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | December 31,           |        
|                                                                            |  | 2007                   |         |   | 2006 |   |         | 2005 |  |   | 2004    |   |  | 2003 |        
|                                                                            |  | (Dollars in Thousands) |        
|Average amount of loans outstanding                                         |  | $                      | 562,478 |   |      | $ | 548,046 |      |  | $ | 510,733 |   |  | $    | 455,993 |   |  | $ | 378,992 |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at beginning of year                   |  | $                      | 5,230   |   |      | $ | 4,972   |      |  | $ | 4,489   |   |  | $    | 4,178   |   |  | $ | 3,827   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Loans charged off:                                                          |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | (466    | ) |      |   | (5      | )    |  |   | (21     | ) |  |      | (17     | ) |  |   | (25     | )
|Commercial                                                                  |  |                        | (33     | ) |      |   | (148    | )    |  |   | (12     | ) |  |      | (45     | ) |  |   | (15     | )
|Consumer installment                                                        |  |                        | (51     | ) |      |   | (88     | )    |  |   | (53     | ) |  |      | (91     | ) |  |   | (122    | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | (550    | ) |      |   | (241    | )    |  |   | (86     | ) |  |      | (153    | ) |  |   | (162    | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Recoveries of loans previously charged off:                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | 1       |   |      |   |        |      |  |   | 9       |   |  |      | 6       |   |  |   | 1       |  
|Commercial                                                                  |  |                        | 1       |   |      |   |        |      |  |   | 1       |   |  |      |        |   |  |   |        |  
|Consumer installment                                                        |  |                        | 16      |   |      |   | 22      |      |  |   | 13      |   |  |      | 15      |   |  |   | 40      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | 18      |   |      |   | 22      |      |  |   | 23      |   |  |      | 21      |   |  |   | 41      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Net loans charged off during the year                                       |  |                        | (532    | ) |      |   | (219    | )    |  |   | (63     | ) |  |      | (132    | ) |  |   | (121    | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Additions to allowance charged to expense during year                       |  |                        | 2,959   |   |      |   | 477     |      |  |   | 546     |   |  |      | 443     |   |  |   | 472     |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Balance of allowance for loan losses at end of year                         |  | $                      | 7,657   |   |      | $ | 5,230   |      |  | $ | 4,972   |   |  | $    | 4,489   |   |  | $ | 4,178   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        |         |   |     
|Ratio of net loans charged off during the year to average loans outstanding |  |                        | 0.09    | % |      |   | 0.04    | %    |  |   | 0.01    | % |  |      | 0.03    | % |  |   | 0.03    | %
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that is deemed appropriate by us to adequately cover all known and inherent risks in the loan portfolio. Our judgment as to the adequacy of the allowance for loan
losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. In assessing the adequacy, management relies predominately on its ongoing review of the loan portfolio.
This review takes into consideration the judgments of the responsible lending officers and senior management, and also those of regulatory agencies that review the loan portfolio as part of the regular bank examination process, as well as reviews
conducted by our outside loan review firm. In evaluating the allowance, management also considers our loan loss experience, deterioration in asset values, general and local economic conditions, concentrations of credit, slowing housing sales and
other appropriate information. Certain nonperforming loans are individually assessed for impairment under Statement of Financial Accounting Standards (SFAS) No. 114 and assigned specific allocations.



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Other identified high-risk loans or credit relationships are also individually assessed and assigned specific
allocations.

As of the indicated dates, we have made allocations of our allowance for loan losses to specifically correspond to the categories of loans
listed below. Based on our best estimate, the allocation of the allowance for loan losses to types of loans, as of the indicated dates, is as follows:



|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  
|------------------------------ |  | ---------------------- | ----- | ------------------------------------------- | ------ | - | ------ | ---- | ------------------------------------------- |  | ------ | ------ |  | ------------------------------------------- | ----- |  | ------ | - | ------------------------------------------- | - | ----- | ------ | ------ | ------------------------------------------- |  | - | ----- |  | ------ | -
|                               |  | December 31,           |      
|                               |  | 2007                   |       |                                             | 2006   |   |        | 2005 |                                             |  | 2004   |        |  | 2003                                        |      
|                               |  | Amount                 |       | Percentof Loansin EachCategoryto TotalLoans |        |   | Amount |      | Percentof Loansin EachCategoryto TotalLoans |  |        | Amount |  | Percentof Loansin EachCategoryto TotalLoans |       |  | Amount |   | Percentof Loansin EachCategoryto TotalLoans |   |       | Amount |        | Percentof Loansin EachCategoryto TotalLoans | 
|                               |  | (Dollars in Thousands) |      
|Commercial                     |  | $                      | 637   |                                             | 8.32   | % |        | $    | 499                                         |  | 5.83   | %      |  | $                                           | 554   |  | 7.01   | % |                                             | $ | 647   |        | 9.71   | %                                           |  | $ | 813   |  | 13.15  | %
|Real estate-construction       |  |                        | 5,625 |                                             | 73.46  |   |        |      | 2,911                                       |  | 55.12  |        |  |                                             | 2,066 |  | 50.35  |   |                                             |   | 1,698 |        | 46.00  |                                             |  |   | 1,015 |  | 37.46  |  
|Real estate-mortgage           |  |                        | 1,310 |                                             | 17.11  |   |        |      | 1,570                                       |  | 37.45  |        |  |                                             | 1,827 |  | 40.60  |   |                                             |   | 1,526 |        | 41.83  |                                             |  |   | 1,625 |  | 45.85  |  
|Consumer installment and other |  |                        | 85    |                                             | 1.11   |   |        |      | 250                                         |  | 1.60   |        |  |                                             | 525   |  | 2.04   |   |                                             |   | 618   |        | 2.46   |                                             |  |   | 725   |  | 3.54   |  
|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  
|Total allowance                |  |                        | 7,657 |                                             | 100.00 | % |        |      | 5,230                                       |  | 100.00 | %      |  | $                                           | 4,972 |  | 100.00 | % |                                             | $ | 4,489 |        | 100.00 | %                                           |  | $ | 4,178 |  | 100.00 | %
|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  

DEPOSITS

Average amounts of deposits and average rates paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, are presented below. (1)



|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|-------------------------------------------- |  | ----------------------- | ------- | ---- | ---- | - | ------ | ---- | ------- |  | ---- | ------ |  | ---- | ------- |  | ---- | -
|                                             |  | Year Ended December 31, |        
|                                             |  | 2007                    |         |      | 2006 |   |        | 2005 |        
|                                             |  | Amount                  |         | Rate |      |   | Amount |      | Rate    |  |      | Amount |  | Rate |        
|                                             |  | (Dollars in Thousands)  |        
|Noninterest-bearing demand deposits          |  | $                       | 76,857  |      |     | % |        | $    | 83,922  |  |     | %      |  | $    | 97,100  |  |     | %
|Interest-bearing demand and savings deposits |  |                         | 154,108 |      | 2.77 |   |        |      | 163,912 |  | 2.64 |        |  |      | 153,669 |  | 2.09 |  
|Time deposits                                |  |                         | 400,165 |      | 5.27 |   |        |      | 332,730 |  | 4.52 |        |  |      | 278,152 |  | 3.45 |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Total deposits                               |  | $                       | 631,130 |      |      |   |        | $    | 580,564 |  |      |        |  | $    | 528,921 |  |      |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------

The
amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2007 are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through six
months (3) over six through twelve months, and (4) over twelve months.



|                               |  |                       |        
|------------------------------ |  | --------------------- | -------
|                               |  | (Dollars inThousands)
|Three months or less           |  | $                     | 26,066 
|Over three through six months  |  |                       | 46,388 
|Over six through twelve months |  |                       | 69,581 
|Over twelve months             |  |                       | 28,486 
|                               |  |                       |        
|Total                          |  | $                     | 170,521
|                               |  |                       |        



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RETURN ON EQUITY AND ASSETS

The following rate of return information for the periods indicated is presented below.



|                           |  |                          |   |  |       |   |  |       |  
|-------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                           |  | Years Ended December 31, |  
|                           |  | 2007                     |   |  | 2006  |   |  | 2005  |  
|Return on assets (1)       |  | 1.19                     | % |  | 1.84  | % |  | 1.67  | %
|Return on equity (2)       |  | 11.53                    |   |  | 18.24 |   |  | 17.13 |  
|Dividend payout ratio (3)  |  | 45.90                    |   |  | 35.63 |   |  | 34.03 |  
|Equity to assets ratio (4) |  | 10.33                    |   |  | 10.06 |   |  | 9.74  |  



|(1) | Net income divided by average total assets.
|--- | -------------------------------------------

|(2) | Net income divided by average equity.
|--- | -------------------------------------

|(3) | Dividends declared per share divided by earnings per share.
|--- | -----------------------------------------------------------

|(4) | Average equity divided by average total assets.
|--- | -----------------------------------------------



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

We are
exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio
as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities that are commonly pass through securities. Finally, we have no exposure to foreign
currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk." The repricing of
interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is our
policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

GAP management alone is not enough to properly manage interest rate
sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a "Prime" rate and thus respond with less volatility to
a market rate change.

We use a third party simulation model to monitor changes in net interest
income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net
interest margins as well as market value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The 4thquarter model reflects an increase of 31% in net interest income and a 16% increase in economic value of equity for a 200 basis point increase in rates. The same model shows a 2% decrease in net interest income and a 17% decrease in
economic value of equity for a 200 basis point decrease in rates. Our investment committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate interest rate policy
for management to follow in order to minimize the impact on earnings and market value of equity in the projected rate environment.



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|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The
following consolidated financial statements of the Registrant and its subsidiaries are included on Exhibit 13 of this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2007 and 2006

Consolidated Statements of Income - Years Ended December 31, 2007, 2006 and 2005

Consolidated Statements of Comprehensive Income - Years Ended December 31, 2007, 2006 and 2005

Consolidated Statements of Stockholders Equity - Years Ended December 31, 2007, 2006 and 2005

Consolidated Statements of Cash Flows - Years Ended December 31, 2007, 2006 and 2005

Notes to Consolidated Financial Statements



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|Item 9. | CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | -----------------------------------------------------------------------------------

The Companys principal accountant has not changed during the Companys two (2) most recent fiscal years or any subsequent interim period.
There has been no Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accounting or reporting disagreements on any matter of accounting principle, practice, financial statement disclosure
or auditing scope or procedure.



|Item 9A. | 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.

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

Managements Report on Internal
Control over Financial Reporting

The management of Henry County Bancshares, Inc. and subsidiaries is responsible for establishing
and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair
presentation of the Companys published financial statements.

All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The management of Henry County Bancshares, Inc. and subsidiaries has assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2007. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2007, the Companys internal control over financial reporting met those criteria and is effective.



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Our independent auditors have issued an attestation report on our assessment of the Companys
internal control over financial reporting. You may find this report below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Henry County Bancshares, Inc.

Stockbridge, Georgia

We have audited Henry County
Bancshares, Inc, and subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Henry County Bancshares, Inc. and subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.



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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Henry County Bancshares, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31,
2007, in all material respects, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Henry County
Bancshares, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ MAULDIN & JENKINS, LLC

Atlanta, Georgia

March 13, 2008



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|Item 9B | OTHER INFORMATION
|------- | -----------------

None.

Part III



|Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

Code
of Ethics

Henry County Bancshares, Inc. has adopted a Code of Ethics that applies to the Companys principal executive officer
and principal financial and accounting officers. A copy of the Henry County Bancshares, Inc. Code of Ethics will be provided to any person, without charge, upon written request made to Thomas L. Redding, Henry County Bancshares, Inc., 4806 N. Henry
Boulevard, Stockbridge, Georgia 30281.

The remaining information required by this Item is incorporated by reference to the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by
this Item is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual
Report.



|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by this Item is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ------------------------------------------------------------------------

The information required by this Item is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report.



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|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

The
information required by this Item is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this Annual Report.

Part IV



|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

The
following documents are filed as part of this report.

(1) Financial statements: The consolidated balance sheets of Henry County
Bancshares, Inc. and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, consolidated statements of comprehensive income, statements of stockholders equity and consolidated statements of
cash flows for each of the years in the three-year period ended December 31, 2007, together with the related notes and the independent auditors report of Mauldin & Jenkins, LLC, independent accountants.

(2) Financial statement schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial
statements or related notes.

(3) Exhibits: A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as part of
this Annual Report is shown on the Exhibit Index filed herewith.

Signatures

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |     |  |                               |  |                                      
|-------------------- |  |  |  | --- |  | ----------------------------- |  | -------------------------------------
|                     |  |  |  |     |  | HENRY COUNTY BANCSHARES, INC.
|                     |  |  | 
|Date: March 14, 2008 |  |  |  | By: |  | /s/ David H. Gill            
|                     |  |  |  |     |  |                               |  | David H. Gill                        
|                     |  |  |  |     |  |                               |  | President and Chief Executive Officer



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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
David H. Gill, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite
or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the
following persons in the capacities indicated on March 14, 2008.



|                         |  |  |  |                                             
|------------------------ |  |  |  | --------------------------------------------
|/s/ Paul J. Cates, Jr.   |  |  |  |                                             
|PAUL J. CATES, JR.       |  |  |  | Director                                    
|                         |  | 
|/s/ Phillip H. Cook      |  |  |  |                                             
|PHILLIP H. COOK          |  |  |  | Director                                    
|                         |  | 
|/s/ H. K. Elliott, Jr.   |  |  |  |                                             
|H. K. ELLIOTT, JR.       |  |  |  | Director                                    
|                         |  | 
|/s/ G. R. Foster, III    |  |  |  |                                             
|G. R. FOSTER, III        |  |  |  | Director                                    
|                         |  | 
|/s/ David H. Gill        |  |  |  |                                             
|DAVID H. GILL            |  |  |  | President, Chief Executive Officer, Director
|                         |  | 
|/s/ Edwin C. Kelley, Jr. |  |  |  |                                             
|EDWIN C. KELLEY, JR.     |  |  |  | Director                                    
|                         |  | 
|/s/ Mary Lynn E. Lambert |  |  |  |                                             
|MARY LYNN E. LAMBERT     |  |  |  | Director                                    
|                         |  | 
|/s/ Robert O. Linch      |  |  |  |                                             
|ROBERT O. LINCH          |  |  |  | Director and Chairman of the Board          
|                         |  | 
|/s/ William C. Strom     |  |  |  |                                             
|WILLIAM C. STROM         |  |  |  | Director and Executive Vice President       
|                         |  | 
|/s/ Ronald M. Turpin     |  |  |  |                                             
|RONALD M. TURPIN         |  |  |  | Director                                    
|                         |  | 
|/s/ James C. Waggoner    |  |  |  |                                             
|JAMES C. WAGGONER        |  |  |  | Director                                    
|                         |  | 
|/s/ Thomas L. Redding    |  |  |  |                                             
|THOMAS L. REDDING        |  |  |  | Chief Financial and Accounting Officer      



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                       
|3.1         |  | Articles of Incorporation of Henry County Bancshares, Inc. (incorporated by reference to Exhibit 3(i) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789 dated July
30, 2002.)                        
|            | 
|3.2         |  | Articles of Correction dated June 24, 1982 (incorporated by reference to Exhibit 3(ii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                      
|            | 
|3.3         |  | Articles of Amendment dated May 27, 1997 (incorporated by reference to Exhibit 3(iii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                       
|            | 
|3.4         |  | Articles of Amendment dated September 16, 1997 (incorporated by reference to Exhibit 3(iv) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30, 2002.)                                  
|            | 
|3.5         |  | Bylaws of Henry County Bancshares, Inc. dated May 2, 1983 (incorporated by reference to Exhibit 3(v) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July
30, 2002.)                        
|            | 
|3.6         |  | Amendment to Bylaws of Henry County Bancshares, Inc. dated December 12, 1996 (incorporated by reference to Exhibit 3(vi) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|3.7         |  | Articles of Amendment dated December 14, 2006 (incorporated by reference to Exhibit 3.7 of the Companys Current Report filed on Form 8-K, File No. 000-49789, dated December 18,
2006).                                          
|            | 
|10.1        |  | Participation Agreement - Executive Salary Continuation Plan - David H. Gill (incorporated by reference to Exhibit 10(i) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|10.2        |  | Participation Agreement - Executive Salary Continuation Plan - William C. Strom (incorporated by reference to Exhibit 10(ii) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)
|            | 
|13          |  | Consolidated Financial Statements of Registrant as of December 31, 2007 and 2006                                                                                                                                                  
|            | 
|21          |  | Schedule of subsidiaries of the Registrant                                                                                                                                                                                        
|            | 
|24          |  | Power of Attorney relating to this Form 10-K is set forth on the signature page of this Form 10-K                                                                                                                                 
|            | 
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Executive Officer                                                                                                                                               
|            | 
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Financial and Accounting Officer                                                                                                                                
|            | 
|32          |  | Section 1350 Certifications