##### Table of Contents





U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 30, 2008



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

For the transition period from  to

Commission File Number: 0-49789





Henry County Bancshares, Inc.

(Exact name of registrant as specified in its
charter)







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

4806 N. Henry Blvd., Stockbridge, Georgia 30281

(Address of principal executive offices)

(770) 474-7293

(Issuers telephone number)

N/A

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





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

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

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

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

State the number of shares outstanding of each of the issuers classes of common equity, as of November 7, 2008:
14,245,690; $2.50 par value.









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HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX



|         |  |                                                                                                                                  |  |      
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | -----
|         |  |                                                                                                                                  |  | Page 
|PART I.  |  | FINANCIAL INFORMATION                                                                                                            |  |      
|         |  |                                                                                                                                 
|         |  | Item 1. Financial Statements                                                                                                     |  |      
|         |  |                                                                                                                                 
|         |  | Consolidated Balance Sheets- September 30, 2008 and December 31, 2007                                                            |  | 3    
|         |  |                                                                                                                                 
|         |  | Consolidated Statements of Operations and Comprehensive Income (Loss)  Three and Nine Months Ended September 30,
 2008 and 2007 |  | 4    
|         |  |                                                                                                                                 
|         |  | Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2008 and 2007                                            |  | 5    
|         |  |                                                                                                                                 
|         |  | Notes to Consolidated Financial Statements                                                                                       |  | 6-10 
|         |  |                                                                                                                                 
|         |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                    |  | 11-19
|         |  |                                                                                                                                 
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                               |  | 20   
|         |  |                                                                                                                                 
|         |  | Item 4. Controls and Procedures                                                                                                  |  | 20   
|         |  |                                                                                                                                 
|PART II. |  | OTHER INFORMATION                                                                                                                |  |      
|         |  |                                                                                                                                 
|         |  | Item 6 - Exhibits and Reports on Form 8-K                                                                                        |  | 21   
|         |  |                                                                                                                                 
|         |  | Signatures                                                                                                                       |  | 22   



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PART I - FINANCIAL INFORMATION

FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(Unaudited)



|                                                                                        |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                        |  | 2008 |             |   | 2007 |  
|Assets                                                                                  |  |      |             |   |      |   |             |  
|Cash and due from banks                                                                 |  | $    | 16,106,503  |   |      | $ | 16,826,236  |  
|Interest bearing deposits in banks                                                      |  |      | 558,516     |   |      |   | 2,731,987   |  
|Federal funds sold                                                                      |  |      | 12,300,000  |   |      |   | 9,500,000   |  
|Securities available for sale, at fair value                                            |  |      | 76,138,198  |   |      |   | 87,717,716  |  
|Securities held to maturity, at cost, (fair value 2008 $3,770,000; 2007 $4,143,401)     |  |      | 3,761,499   |   |      |   | 4,164,690   |  
|Restricted equity securities, at cost                                                   |  |      | 1,877,851   |   |      |   | 1,897,751   |  
|Loans held for sale                                                                     |  |      | 94,254      |   |      |   | 950,405     |  
|                                                                                        |  |     
|Loans                                                                                   |  |      | 548,189,290 |   |      |   | 569,387,551 |  
|Less allowance for loan losses                                                          |  |      | 15,352,189  |   |      |   | 7,657,387   |  
|                                                                                        |  |      |             |   |      |   |             |  
|Loans, net                                                                              |  |      | 532,837,101 |   |      |   | 561,730,164 |  
|                                                                                        |  |     
|Premises and equipment                                                                  |  |      | 9,891,201   |   |      |   | 10,341,368  |  
|Other real estate                                                                       |  |      | 14,810,327  |   |      |   | 10,394,433  |  
|Other assets                                                                            |  |      | 14,229,179  |   |      |   | 12,741,299  |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total assets                                                                            |  | $    | 682,604,629 |   |      | $ | 718,996,049 |  
|                                                                                        |  |      |             |   |      |   |             |  
|                                                                                        |  |     
|Liabilities and Stockholders Equity                                                    |  |      |             |   |      |   |             |  
|                                                                                        |  |     
|Deposits                                                                                |  |      |             |   |      |   |             |  
|Noninterest-bearing                                                                     |  | $    | 63,025,424  |   |      | $ | 71,388,083  |  
|Interest-bearing                                                                        |  |      | 537,403,850 |   |      |   | 554,463,038 |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total deposits                                                                          |  |      | 600,429,274 |   |      |   | 625,851,121 |  
|Other borrowings                                                                        |  |      | 7,525,279   |   |      |   | 13,424,498  |  
|Other liabilities                                                                       |  |      | 3,655,955   |   |      |   | 4,186,288   |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities                                                                       |  |      | 611,610,508 |   |      |   | 643,461,907 |  
|                                                                                        |  |      |             |   |      |   |             |  
|                                                                                        |  |     
|Stockholders equity                                                                    |  |      |             |   |      |   |             |  
|Common stock, par value $2.50; 30,000,000 shares authorized; 14,388,749.6 shares issued |  |      | 35,971,874  |   |      |   | 35,971,874  |  
|Capital surplus                                                                         |  |      | 739,560     |   |      |   | 739,560     |  
|Retained earnings                                                                       |  |      | 36,550,720  |   |      |   | 40,644,829  |  
|Accumulated other comprehensive income                                                  |  |      | 50,571      |   |      |   | 435,733     |  
|Treasury stock, 143,060 and 138,560 shares, respectively                                |  |      | (2,318,604  | ) |      |   | (2,257,854  | )
|                                                                                        |  |      |             |   |      |   |             |  
|Total stockholders equity                                                              |  |      | 70,994,121  |   |      |   | 75,534,142  |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                              |  | $    | 682,604,629 |   |      | $ | 718,996,049 |  
|                                                                                        |  |      |             |   |      |   |             |  

See Notes to Consolidated Financial Statements.



3



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)



|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|---------------------------------------------------------------------- | ---- | ------------------------------- | ---------- | ------------------------------ |  | ---- | ---------- |  | ---- | ---------- | - |  | - | ----------
|                                                                       |      | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                                       | 2008 |                                 |            | 2007                           |  | 2008 |            |  | 2007
|Interest income                                                        |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Loans                                                                  |      | $                               | 7,716,516  |                                |  | $    | 11,101,371 |  | $    | 25,067,626 |   |  | $ | 34,514,179
|Taxable securities                                                     |      |                                 | 826,145    |                                |  |      | 1,413,061  |  |      | 2,863,252  |   |  |   | 3,748,241 
|Nontaxable securities                                                  |      |                                 | 97,875     |                                |  |      | 95,190     |  |      | 264,201    |   |  |   | 272,074   
|Deposits in banks                                                      |      |                                 | 508        |                                |  |      | 34,895     |  |      | 33,835     |   |  |   | 41,791    
|Federal funds sold                                                     |      |                                 | 23,621     |                                |  |      | 195,342    |  |      | 165,322    |   |  |   | 766,264   
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Total interest income                                                  |      |                                 | 8,664,665  |                                |  |      | 12,839,859 |  |      | 28,394,236 |   |  |   | 39,342,549
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Interest expense                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Deposits                                                               |      |                                 | 4,497,406  |                                |  |      | 6,615,861  |  |      | 15,244,544 |   |  |   | 18,705,125
|Other borrowings                                                       |      |                                 | 60,024     |                                |  |      | 176,481    |  |      | 204,368    |   |  |   | 792,245   
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Total interest expense                                                 |      |                                 | 4,557,430  |                                |  |      | 6,792,342  |  |      | 15,448,912 |   |  |   | 19,497,370
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Net interest income                                                    |      |                                 | 4,107,235  |                                |  |      | 6,047,517  |  |      | 12,945,324 |   |  |   | 19,845,179
|Provision for loan losses                                              |      |                                 | 5,650,000  |                                |  |      | 1,257,754  |  |      | 8,285,750  |   |  |   | 1,434,254 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Net interest income (loss) after provision for loan losses             |      |                                 | (1,542,765 | )                              |  |      | 4,789,763  |  |      | 4,659,574  |   |  |   | 18,410,925
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Other operating income                                                 |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Service charges on deposit accounts                                    |      |                                 | 345,184    |                                |  |      | 327,942    |  |      | 1,021,362  |   |  |   | 1,003,703 
|Other service charges and fees                                         |      |                                 | 279,645    |                                |  |      | 270,452    |  |      | 811,744    |   |  |   | 840,771   
|Mortgage banking income                                                |      |                                 | 72,005     |                                |  |      | 163,635    |  |      | 314,189    |   |  |   | 491,125   
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Total other income                                                     |      |                                 | 696,834    |                                |  |      | 762,029    |  |      | 2,147,295  |   |  |   | 2,335,599 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Other expenses                                                         |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Salaries and employee benefits                                         |      |                                 | 1,739,646  |                                |  |      | 1,887,351  |  |      | 5,405,412  |   |  |   | 5,419,357 
|Occupancy and equipment expenses                                       |      |                                 | 494,855    |                                |  |      | 513,358    |  |      | 1,461,764  |   |  |   | 1,428,129 
|Other real estate losses                                               |      |                                 | 893,640    |                                |  |      |           |  |      | 1,845,310  |   |  |   |          
|Other operating expenses                                               |      |                                 | 456,692    |                                |  |      | 554,083    |  |      | 1,733,303  |   |  |   | 1,723,907 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Total other expenses                                                   |      |                                 | 3,584,833  |                                |  |      | 2,954,792  |  |      | 10,445,789 |   |  |   | 8,571,393 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Income (loss) before income taxes                                      |      |                                 | (4,430,764 | )                              |  |      | 2,597,000  |  |      | (3,638,920 | ) |  |   | 12,175,131
|Income tax expense (benefit)                                           |      |                                 | (1,820,005 | )                              |  |      | 936,399    |  |      | (1,681,665 | ) |  |   | 4,508,832 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Net income (loss)                                                      |      |                                 | (2,610,759 | )                              |  |      | 1,660,601  |  |      | (1,957,255 | ) |  |   | 7,666,299 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Other comprehensive income (loss):                                     |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Unrealized gains (losses) on securities available for sale, net of tax |      |                                 | 244,008    |                                |  |      | 469,709    |  |      | (385,162   | ) |  |   | 225,594   
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Comprehensive income (loss)                                            |      | $                               | (2,366,751 | )                              |  | $    | 2,130,310  |  | $    | (2,342,417 | ) |  | $ | 7,891,893 
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Earnings (loss) per share                                              |      | $                               | (0.18      | )                              |  | $    | 0.12       |  | $    | (0.14      | ) |  | $ | 0.54      
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Weighted average shares outstanding                                    |      |                                 | 14,245,690 |                                |  |      | 14,321,468 |  |      | 14,245,723 |   |  |   | 14,321,468
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           
|Cash dividends per share                                               |      | $                               | 0.03       |                                |  | $    | 0.06       |  | $    | 0.15       |   |  | $ | 0.18      
|                                                                       |      |                                 |            |                                |  |      |            |  |      |            |   |  |   |           

See Notes to Consolidated Financial Statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)



|                                                                                         |  |      |             |   |      |   |             |  
|---------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                         |  | 2008 |             |   | 2007 |  
|OPERATING ACTIVITIES                                                                     |  |      |             |   |      |   |             |  
|Net income (loss)                                                                        |  | $    | (1,957,255  | ) |      | $ | 7,666,299   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation                                                                             |  |      | 514,703     |   |      |   | 501,668     |  
|Net decrease in loans held for sale                                                      |  |      | 856,151     |   |      |   | 666,066     |  
|Provision for loan losses                                                                |  |      | 8,285,750   |   |      |   | 1,434,254   |  
|Writedowns of other real estate owned                                                    |  |      | 1,600,027   |   |      |   |            |  
|Net losses on sale of other real estate                                                  |  |      | 245,283     |   |      |   | 13,522      |  
|(Increase) decrease in interest receivable                                               |  |      | 2,285,689   |   |      |   | (1,427,501  | )
|Increase (decrease) in interest payable                                                  |  |      | (948,199    | ) |      |   | 264,750     |  
|Net other operating activities                                                           |  |      | (3,157,286  | ) |      |   | (169,963    | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                                |  |      | 7,724,863   |   |      |   | 8,949,095   |  
|                                                                                         |  |      |             |   |      |   |             |  
|INVESTING ACTIVITIES                                                                     |  |      |             |   |      |   |             |  
|Purchases of securities available for sale                                               |  |      | (42,404,111 | ) |      |   | (70,978,609 | )
|Purchases of securities held to maturity                                                 |  |      |            |   |      |   | (1,001,140  | )
|Proceeds from maturities of securities available for sale                                |  |      | 53,400,050  |   |      |   | 39,262,119  |  
|Proceeds from maturities of securities held to maturity                                  |  |      | 403,191     |   |      |   | 108,297     |  
|Retirement of restricted equity securities                                               |  |      | 19,900      |   |      |   | 471,900     |  
|Net increase in federal funds sold                                                       |  |      | (2,800,000  | ) |      |   | (16,900,000 | )
|Net (increase) decrease in interest bearing deposits in banks                            |  |      | 2,173,471   |   |      |   | (1,432,340  | )
|Net (increase) decrease in loans                                                         |  |      | 13,080,604  |   |      |   | (10,007,207 | )
|Proceeds from sale of other real estate                                                  |  |      | 1,265,505   |   |      |   | 632,228     |  
|Purchase of premises and equipment                                                       |  |      | (64,536     | ) |      |   | (1,061,518  | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash provided (used in) by investing activities                                      |  |      | 25,074,074  |   |      |   | (60,906,270 | )
|                                                                                         |  |      |             |   |      |   |             |  
|FINANCING ACTIVITIES                                                                     |  |      |             |   |      |   |             |  
|Net increase (decrease) in deposits                                                      |  |      | (25,421,847 | ) |      |   | 59,161,260  |  
|Net repayments of other borrowings                                                       |  |      | (5,899,219  | ) |      |   | (7,792,188  | )
|Dividends paid                                                                           |  |      | (2,136,854  | ) |      |   | (2,577,863  | )
|Purchase of treasury stock                                                               |  |      | (60,750     | ) |      |   |            |  
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash provided by (used in) financing activities                                      |  |      | (33,518,670 | ) |      |   | 48,791,209  |  
|                                                                                         |  |      |             |   |      |   |             |  
|Net decrease in cash and due from banks                                                  |  |      | (719,733    | ) |      |   | (3,165,966  | )
|Cash and due from banks, beginning of period                                             |  |      | 16,826,236  |   |      |   | 18,584,790  |  
|                                                                                         |  |      |             |   |      |   |             |  
|Cash and due from banks, end of period                                                   |  | $    | 16,106,503  |   |      | $ | 15,418,824  |  
|                                                                                         |  |      |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                        |  |      |             |   |      |   |             |  
|Cash paid for:                                                                           |  |      |             |   |      |   |             |  
|Interest                                                                                 |  | $    | 16,397,111  |   |      | $ | 19,232,620  |  
|                                                                                         |  |     
|Income taxes                                                                             |  | $    | 1,339,742   |   |      | $ | 5,578,299   |  
|                                                                                         |  |     
|Noncash transactions:                                                                    |  |      |             |   |      |   |             |  
|Other real estate acquired in settlement of loans                                        |  | $    | 8,342,081   |   |      | $ | 895,290     |  
|                                                                                         |  |     
|Financed sales of other real estate owned                                                |  | $    | 815,372     |   |      | $ | 73,845      |  

See Notes to Consolidated Financial Statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|NOTE 1. | BASIS OF PRESENTATION
|------- | ---------------------

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

The results of operations for the three and nine month periods ended
September 30, 2008 are not necessarily indicative of the results to be expected for the full year.

Adoption of New Accounting
Standards

Fair Value Option and Fair Value Measurements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy prioritizing the assumptions used to measure fair value and clarifies assumptions about risk and the effect
of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement
No. 157.This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. As permitted under FASB Staff Position No. FAS 157-2, the Company has elected to defer the application of FAS 157 to nonfinancial assets and liabilities until
January 1, 2009. The Company does not believe the impact will be material to the financial condition of the Company.

In February 2007,
the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on
January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.



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Fair Value Measurement

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

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

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis

Fair Value Measurements at September 30, 2008, using:



|                              |  |                                                     |   |                                    |   |                                |  |   |  
|----------------------------- |  | --------------------------------------------------- | - | ---------------------------------- | - | ------------------------------ |  | - | -
|                              |  | Quoted Prices in ActiveMarkets for Identical Assets |   | Significant Other ObservableInputs |   | Significant UnobservableInputs
|                              |  | (Level 1)                                           |   | (Level 2)                          |   | (Level 3)                     
|Assets:                       |  |                                                     |   |                                    |   |                                |  |   |  
|Available for sale securities |  | $                                                   |  |                                    | $ | 76,138,198                     |  | $ | 

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



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

Assets and Liabilities Measured on a Nonrecurring Basis

Fair Value Measurements at
September 30, 2008, using:



|               |  |                                                     |   |                                    |   |                                |  |   |           
|-------------- |  | --------------------------------------------------- | - | ---------------------------------- | - | ------------------------------ |  | - | ----------
|               |  | Quoted Prices in ActiveMarkets for Identical Assets |   | Significant Other ObservableInputs |   | Significant UnobservableInputs
|               |  | (Level 1)                                           |   | (Level 2)                          |   | (Level 3)                     
|Assets:        |  |                                                     |   |                                    |   |                                |  |   |           
|Impaired loans |  | $                                                   |  |                                    | $ |                               |  | $ | 61,828,856



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##### Table of Contents

|NOTE 2. | SUPPLEMENTAL SEGMENT INFORMATION
|------- | --------------------------------

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

The accounting policies of the segments are the same as those described in the footnotes
to the December 31, 2007 consolidated financial statements as filed in our annual report on Form 10-K. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.

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

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



|                                             |  |                   |             |   |          |   |          |          |  |   |              |   |  |       |            |   |  |   |             |  
|-------------------------------------------- |  | ----------------- | ----------- | - | -------- | - | -------- | -------- |  | - | ------------ | - |  | ----- | ---------- | - |  | - | ----------- | -
|                                             |  | INDUSTRY SEGMENTS |            
|For the Nine Months Ended September 30, 2008 |  | CommercialBanking |             |   | Mortgage |   |          | AllOther |  |   | Eliminations |   |  | Total |           
|Interest income                              |  | $                 | 28,419,118  |   |          | $ | 6,920    |          |  | $ |             |   |  | $     | (31,802    | ) |  | $ | 28,394,236  |  
|Interest expense                             |  |                   | 15,455,832  |   |          |   | 24,882   |          |  |   |             |   |  |       | (31,802    | ) |  |   | 15,448,912  |  
|Net interest income (expense)                |  |                   | 12,963,286  |   |          |   | (17,962  | )        |  |   |             |   |  |       |           |   |  |   | 12,945,324  |  
|Intersegment net interest income (expense)   |  |                   | 17,962      |   |          |   | (17,962  | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Other revenue from external sources          |  |                   | 1,823,656   |   |          |   | 314,189  |          |  |   | 9,450        |   |  |       |           |   |  |   | 2,147,295   |  
|Intersegment other revenues                  |  |                   | 18,630      |   |          |   | (18,630  | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Depreciation                                 |  |                   | 509,675     |   |          |   | 345      |          |  |   | 4,683        |   |  |       |           |   |  |   | 514,703     |  
|Provision for loan losses                    |  |                   | 8,285,750   |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 8,285,750   |  
|Segment loss                                 |  |                   | (3,433,542  | ) |          |   | (183,477 | )        |  |   | (21,901      | ) |  |       |           |   |  |   | (3,638,920  | )
|Segment assets                               |  |                   | 683,044,749 |   |          |   | 754,977  |          |  |   | 262,645      |   |  |       | (1,457,742 | ) |  |   | 682,604,629 |  
|Expenditures for premises and equipment      |  |                   | 64,536      |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 64,536      |  



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##### Table of Contents

|NOTE 2. | SUPPLEMENTAL SEGMENT INFORMATION (Continued)
|------- | --------------------------------------------



|                                              |  |                   |             |   |          |   |          |          |  |   |              |   |  |       |            |   |  |   |             |  
|--------------------------------------------- |  | ----------------- | ----------- | - | -------- | - | -------- | -------- |  | - | ------------ | - |  | ----- | ---------- | - |  | - | ----------- | -
|                                              |  | INDUSTRY SEGMENTS |            
|For the Nine Months Ended September 30, 2007  |  | CommercialBanking |             |   | Mortgage |   |          | AllOther |  |   | Eliminations |   |  | Total |           
|Interest income                               |  | $                 | 39,391,440  |   |          | $ | 13,101   |          |  | $ |             |   |  | $     | (61,992    | ) |  | $ | 39,342,549  |  
|Interest expense                              |  |                   | 19,510,471  |   |          |   | 48,891   |          |  |   |             |   |  |       | (61,992    | ) |  |   | 19,497,370  |  
|Net interest income (expense)                 |  |                   | 19,880,969  |   |          |   | (35,790  | )        |  |   |             |   |  |       |           |   |  |   | 19,845,179  |  
|Intersegment net interest income (expense)    |  |                   | 35,790      |   |          |   | (35,790  | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Other revenue from external sources           |  |                   | 1,835,024   |   |          |   | 491,125  |          |  |   | 9,450        |   |  |       |           |   |  |   | 2,335,599   |  
|Intersegment other revenues                   |  |                   | 18,630      |   |          |   | (18,630  | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Depreciation                                  |  |                   | 496,535     |   |          |   | 450      |          |  |   | 4,683        |   |  |       |           |   |  |   | 501,668     |  
|Provision for loan losses                     |  |                   | 1,434,254   |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 1,434,254   |  
|Segment profit (loss)                         |  |                   | 12,327,284  |   |          |   | (108,731 | )        |  |   | (43,422      | ) |  |       |           |   |  |   | 12,175,131  |  
|Segment assets                                |  |                   | 752,650,902 |   |          |   | 825,938  |          |  |   | 1,095,059    |   |  |       | (2,542,654 | ) |  |   | 752,029,245 |  
|Expenditures for premises and equipment       |  |                   | 1,061,518   |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 1,061,518   |  
|                                              | 
|                                              |  | INDUSTRY SEGMENTS |            
|For the Three Months Ended September 30, 2008 |  | CommercialBanking |             |   | Mortgage |   |          | AllOther |  |   | Eliminations |   |  | Total |           
|Interest income                               |  | $                 | 8,669,433   |   |          | $ | 1,972    |          |  | $ |             |   |  | $     | (6,740     | ) |  | $ | 8,664,665   |  
|Interest expense                              |  |                   | 4,559,402   |   |          |   | 4,768    |          |  |   |             |   |  |       | (6,740     | ) |  |   | 4,557,430   |  
|Net interest income (expense)                 |  |                   | 4,110,031   |   |          |   | (2,796   | )        |  |   |             |   |  |       |           |   |  |   | 4,107,235   |  
|Intersegment net interest income (expense)    |  |                   | 2,796       |   |          |   | (2,796   | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Other revenue from external sources           |  |                   | 621,679     |   |          |   | 72,005   |          |  |   | 3,150        |   |  |       |           |   |  |   | 696,834     |  
|Intersegment other revenues                   |  |                   | 6,210       |   |          |   | (6,210   | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Depreciation                                  |  |                   | 165,845     |   |          |   | 86       |          |  |   | 1,561        |   |  |       |           |   |  |   | 167,492     |  
|Provision for loan losses                     |  |                   | 5,650,000   |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 5,650,000   |  
|Segment loss                                  |  |                   | (4,336,602  | ) |          |   | (82,551  | )        |  |   | (11,611      | ) |  |       |           |   |  |   | (4,430,764  | )
|Expenditures for premises and equipment       |  |                   | 55,363      |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 55,363      |  
|                                              | 
|                                              |  | INDUSTRY SEGMENTS |            
|For the Three Months Ended September 30, 2007 |  | CommercialBanking |             |   | Mortgage |   |          | AllOther |  |   | Eliminations |   |  | Total |           
|Interest income                               |  | $                 | 12,857,397  |   |          | $ | 4,290    |          |  | $ |             |   |  | $     | (21,828    | ) |  | $ | 12,839,859  |  
|Interest expense                              |  |                   | 6,796,632   |   |          |   | 17,538   |          |  |   |             |   |  |       | (21,828    | ) |  |   | 6,792,342   |  
|Net interest income (expense)                 |  |                   | 6,060,765   |   |          |   | (13,248  | )        |  |   |             |   |  |       |           |   |  |   | 6,047,517   |  
|Intersegment net interest income (expense)    |  |                   | 13,248      |   |          |   | (13,248  | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Other revenue from external sources           |  |                   | 595,244     |   |          |   | 163,635  |          |  |   | 3,150        |   |  |       |           |   |  |   | 762,029     |  
|Intersegment other revenues                   |  |                   | 6,210       |   |          |   | (6,210   | )        |  |   |             |   |  |       |           |   |  |   |            |  
|Depreciation                                  |  |                   | 175,067     |   |          |   | 130      |          |  |   | 1,561        |   |  |       |           |   |  |   | 176,758     |  
|Provision for loan losses                     |  |                   | 1,257,754   |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 1,257,754   |  
|Segment profit (loss)                         |  |                   | 2,637,147   |   |          |   | (28,565  | )        |  |   | (11,582      | ) |  |       |           |   |  |   | 2,597,000   |  
|Expenditures for premises and equipment       |  |                   | 463,210     |   |          |   |         |          |  |   |             |   |  |       |           |   |  |   | 463,210     |  



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following is managements discussion and analysis of certain significant factors which have affected the financial position and operating results of Henry County Bancshares, Inc. and its subsidiaries, The
First State Bank ( the Bank) and First Metro Mortgage Co., during the periods included in the accompanying consolidated financial statements.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

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

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

Critical Accounting Policies

We have
adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to
the consolidated financial statements at December 31, 2007 as filed in our annual report on Form 10-K.

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

Determination of the Banks allowance for loan losses as well as allowance for other real estate owned have been identified as critical accounting policies. Please see the portion of this discussion that addresses our allowance for
loan losses for a description of our processes and methodology for determining our allowance for loan losses. The allowance for other real estate owned is determined primarily using external appraisals and adjusting such appraised values for
estimated disposal costs and other factors that management believes will impact appraised values.



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##### Table of Contents

Liquidity and Capital Resources

We manage our liquidity to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Liquidity needs are met through loan repayments, cash flows received from pay downs on
mortgage backed securities, net interest and fee income as well as continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings. Management regularly monitors deposit flow and evaluates
alternate pricing structures to retain and grow deposits as needed. Traditional local deposit funding sources are supplemented by the use of FHLB borrowings as well as brokered deposits.

At September 30, 2008, our capital ratios were in excess of the regulatory minimum capital requirements to be classified as well-capitalized. The regulatory minimum capital requirements to be classified as
well-capitalized and our actual capital ratios on a consolidated and bank-only basis are as follows:



|                           |              |        |   |      |                              |   |  |       |  
|-------------------------- | ------------ | ------ | - | ---- | ---------------------------- | - |  | ----- | -
|                           |              | Actual |   |      | MinimumRegulatoryRequirement |  
|                           | Consolidated |        |   | Bank |                              |  
|Leverage capital ratios    |              | 10.46  | % |      | 10.42                        | % |  | 5.00  | %
|Risk-based capital ratios: |              |        |   |      |                              |   |  |       |  
|Core capital               |              | 12.13  |   |      | 12.09                        |   |  | 6.00  |  
|Total capital              |              | 13.40  |   |      | 13.36                        |   |  | 10.00 |  

Off-Balance Sheet Risk

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

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use
the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is as follows:



|                             |  |                   |           
|---------------------------- |  | ----------------- | ----------
|                             |  | September 30,2008
|Commitments to extend credit |  | $                 | 71,787,000
|Letters of credit            |  |                   | 6,295,000 
|                             |  |                   |           
|                             |  | $                 | 78,082,000
|                             |  |                   |           

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments are expected to expire without being



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##### Table of Contents

drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by us
upon extension of credit, is based on our credit evaluation of the customer.

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

Financial Condition

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



|                                   |                        |                   |         |                  |   |        
|---------------------------------- | ---------------------- | ----------------- | ------- | ---------------- | - | -------
|                                   |                        | September 30,2008 |         | December 31,2007
|                                   | (Dollars in Thousands)
|Cash and due from banks            |                        | $                 | 16,106  |                  | $ | 16,826 
|Interest-bearing deposits in banks |                        |                   | 559     |                  |   | 2,732  
|Federal funds sold                 |                        |                   | 12,300  |                  |   | 9,500  
|Securities                         |                        |                   | 81,778  |                  |   | 93,781 
|Loans, net                         |                        |                   | 532,837 |                  |   | 561,730
|Loans held for sale                |                        |                   | 94      |                  |   | 950    
|Premises and equipment             |                        |                   | 9,891   |                  |   | 10,341 
|Other assets                       |                        |                   | 29,039  |                  |   | 23,136 
|                                   |                        |                   |         |                  |   |        
|                                   |                        | $                 | 682,604 |                  | $ | 718,996
|                                   |                        |                   |         |                  |   |        
|Total deposits                     |                        | $                 | 600,429 |                  | $ | 625,851
|Other borrowings                   |                        |                   | 7,525   |                  |   | 13,424 
|Other liabilities                  |                        |                   | 3,656   |                  |   | 4,187  
|Stockholders equity               |                        |                   | 70,994  |                  |   | 75,534 
|                                   |                        |                   |         |                  |   |        
|                                   |                        | $                 | 682,604 |                  | $ | 718,996
|                                   |                        |                   |         |                  |   |        

Our assets declined by 5.06% for the first nine months of 2008. Net loans decreased by $28.9 million, primarily
due to the transfer of approximately $8.3 million to other real estate owned as a result of foreclosures during the first nine months of 2008 and increased allowances for loan losses during 2008. The remaining decrease in net outstanding loans is a
result of normal pay down activity as we have experienced a slowing of new loan production during the first nine months of 2008. Decreases in interest-bearing deposits of $2.2 million, and investment securities of $12.1 million were primarily used
to offset decreases in time deposits for the first nine months of 2008. Total deposits decreased $25.4 million during the first nine months of 2008. The decrease in deposit accounts was primarily a result of decreases in non-brokered time deposits
of $40.5 million, offset by increases in brokered time deposits of $29.5 million. Interest bearing checking, savings and demand deposits has decreased $14.4 million for the first nine months of 2008. This reflects a strategic decision by the Company
to allow higher-priced time deposits where there was no other customer relationship to be withdrawn upon maturity rather than maintain higher interest rates. Other borrowings decreased $5.9 million during the first nine months of 2008, primarily as
a result of our Federal Home Loan Bank advances decreasing by $6.3 million. The Company takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of funding. Our total equity has decreased by $4.5
million year to date as a result of net losses of $1,957,000, increased unrealized losses on securities available for sale, net of tax, of $385,000, purchases of treasury stock of $61,000 and by dividends paid of $2.1 million.



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##### Table of Contents

Results of Operations For The Three and Nine Months Ended September 30, 2008 and 2007

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



|                          |                        |                                 |        |      |  |   |       
|------------------------- | ---------------------- | ------------------------------- | ------ | ---- |  | - | ------
|                          |                        | Three Months EndedSeptember 30,
|                          | 2008                   |                                 |        | 2007
|                          | (Dollars in Thousands)
|Interest income           |                        | $                               | 8,665  |      |  | $ | 12,840
|Interest expense          |                        |                                 | 4,557  |      |  |   | 6,792 
|                          |                        |                                 |        |      |  |   |       
|Net interest income       |                        |                                 | 4,108  |      |  |   | 6,048 
|Provision for loan losses |                        |                                 | 5,650  |      |  |   | 1,258 
|Other income              |                        |                                 | 696    |      |  |   | 762   
|Other expense             |                        |                                 | 3,585  |      |  |   | 2,955 
|                          |                        |                                 |        |      |  |   |       
|Pretax income (loss)      |                        |                                 | (4,431 | )    |  |   | 2,597 
|Income taxes (benefit)    |                        |                                 | (1,820 | )    |  |   | 936   
|                          |                        |                                 |        |      |  |   |       
|Net income (loss)         |                        | $                               | (2,611 | )    |  | $ | 1,661 
|                          |                        |                                 |        |      |  |   |       
|                          |                       
|                          |                        | Nine Months EndedSeptember 30, 
|                          | 2008                   |                                 |        | 2007
|                          | (Dollars in Thousands)
|Interest income           |                        | $                               | 28,394 |      |  | $ | 39,342
|Interest expense          |                        |                                 | 15,449 |      |  |   | 19,497
|                          |                        |                                 |        |      |  |   |       
|Net interest income       |                        |                                 | 12,945 |      |  |   | 19,845
|Provision for loan losses |                        |                                 | 8,286  |      |  |   | 1,434 
|Other income              |                        |                                 | 2,147  |      |  |   | 2,335 
|Other expense             |                        |                                 | 10,445 |      |  |   | 8,571 
|                          |                        |                                 |        |      |  |   |       
|Pretax income (loss)      |                        |                                 | (3,639 | )    |  |   | 12,175
|Income taxes (benefit)    |                        |                                 | (1,682 | )    |  |   | 4,509 
|                          |                        |                                 |        |      |  |   |       
|Net income (loss)         |                        | $                               | (1,957 | )    |  | $ | 7,666 
|                          |                        |                                 |        |      |  |   |       



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##### Table of Contents

Our third quarter results were highlighted by increased provisions for loan losses and compressed net interest margins,
which together contributed to a net loss of $2,611,000, or $0.18 per share. These factors have also contributed to a net loss for the first nine months of 2008. Our net loss for the nine months ending September 30, 2008 was $1,957,000, or $0.14
per share compared to net income of $7,666,000 or $0.54 per share for the same period in 2007.

Our net interest income decreased by $1,940,000 in the
third quarter of 2008 and decreased by $6,900,000 for the first nine months of 2008 as compared to the same periods in 2007. Our net yield on average interest-earning assets decreased to 2.64% in the first nine months of 2008 as compared to 3.86% in
the first nine months of 2007. The decrease in net yield on average earning assets is primarily due to a reduction in interest income on loans as a result of a decrease in the Prime lending rate from the end of 2007. Our net yield on average
interest-earning assets was 3.64% for the entire year of 2007. Our increasing levels of nonperforming loans have also negatively affected our net interest margin. Interest income that would have been recorded on nonaccrual loans since the end of
2007, including reversals of interest from prior periods, amounted to approximately $3.8 million during the first nine months of 2008, effectively lowering our net yield on average earning assets by 79 basis points. Our net cost on interest-bearing
liabilities decreased to 3.80% during the first nine months of 2008 compared to 4.63% for the same period in 2007. The decrease in interest expense is largely the result of a lower cost of funds during the first nine months of 2008.

The provision for loan losses amounted to $5,650,000 and $8,286,000 for the third quarter and first nine months of 2008, respectively. The amounts provided are
indicative of our assessment of the inherent risk in the loan portfolio at September 30, 2008. The allowance for loan losses as a percentage of total loans was 2.80% at September 30, 2008 as compared to 1.34% at December 31, 2007. The
allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately cover all known and inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a continuing review of loan loss
experience, current economic conditions which may affect the borrowers ability to repay and the underlying collateral value. Please see the information on page 18 for a further discussion of our allowance for loan losses methodology.

The following table shows our nonperforming assets as of September 30, 2008, December 31, 2007, and September 30, 2007:



|                                                                                                         |                        |                   |        |                  |   |                   |  |   |       
|-------------------------------------------------------------------------------------------------------- | ---------------------- | ----------------- | ------ | ---------------- | - | ----------------- |  | - | ------
|                                                                                                         |                        | September 30,2008 |        | December 31,2007 |   | September 30,2007
|                                                                                                         | (Dollars in Thousands)
|Nonaccrual loans                                                                                         |                        | $                 | 57,236 |                  | $ | 32,744            |  | $ | 17,330
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |                        |                   | 6,417  |                  |   | 4,714             |  |   | 3,206 
|Restructured loans                                                                                       |                        |                   | 0      |                  |   | 0                 |  |   | 0     
|                                                                                                         |                        |                   |        |                  |   |                   |  |   |       
|Total nonperforming loans                                                                                |                        | $                 | 63,653 |                  | $ | 37,458            |  | $ | 20,536
|                                                                                                         |                        |                   |       
|Other real estate                                                                                        |                        |                   | 14,810 |                  |   | 10,394            |  |   | 1,586 
|                                                                                                         |                        |                   |        |                  |   |                   |  |   |       
|Total nonperforming assets                                                                               |                        | $                 | 78,463 |                  | $ | 47,852            |  | $ | 22,122
|                                                                                                         |                        |                   |        |                  |   |                   |  |   |       

Nonperforming assets consist of nonaccrual loans, loans restructured due to the debtors financial
difficulties, loans past due 90 days or more as to interest or principal and still accruing, and other real estate owned, which is real estate acquired through foreclosure. Nonaccrual loans are those loans on which recognition of interest income has
been discontinued. Restructured loans generally allow for an extension of the original repayment period or a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower.



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When management believes there is sufficient doubt to the collectibility of principal or interest on any loan based on
its contractual terms, or generally when loans are 90 days or more past due, the accrual of interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection. Interest payments
received on nonaccrual loans are either applied against principal or reported as income according to managements judgment as to the collectibility of principal. Loans are returned to an accrual status when those factors that indicated doubtful
collectibility on a timely basis no longer exist. Other real estate owned is initially recorded at the lower of cost or estimated value at the date of acquisition. A provision for estimated losses is recorded when a subsequent decline in value
occurs.

Nonperforming assets at September 30, 2008 amounted to approximately $78.5 million, or 13.93% of total loans and other real estate. This
compares to approximately $47.8 million or 8.25% of total loans and other real estate at December 31, 2007, and $22.1 million or 3.87% at September 30, 2007. The increase in nonperforming assets is primarily attributable to the significant
slowdown in residential real estate sales that began in the summer of 2007 and has continued through the first nine months of 2008. Nonperforming loans are concentrated in our residential construction and land development portfolio, comprising 89%
of total nonperforming loans. The amount of residential construction and development loans as a percentage of our total loan portfolio is approximately 54%, leaving a large percentage of our loan portfolio performing. With the significant slowing of
home and land sales, the prices of homes and land have declined. Therefore, many of our customers who develop and sell residential real estate cannot service their loans because they are not generating sufficient revenue, resulting in the
significant increase in nonaccrual loans.

Nonaccrual loans increased by $24.5 million or 75% during the nine month period ended September 30, 2008.
There was significant movement within these loans during the first nine months of this year, as $42.7 million went on nonaccrual status, $8.5 million went into foreclosure, and $7.5 million returned to accrual status through the repayment of
previously accrued interest. In addition to these changes, we have received $2.2 million in principal reductions in these loans during the first nine months of this year. The ten largest nonaccrual loan relationships comprise $43.6 million or 76% of
the total and all are collateralized by residential real estate.

Other real estate owned increased by $4.4 million, or 42% during the nine month period
ended September 30, 2008. During the first nine months of 2008, we foreclosed on $8.3 million of real estate, net of write downs and losses of $1.8 million and sold $2.1 million of real estate. The total balance of $14.8 million at
September 30, 2008 is distributed as follows; residential development (65%), homes and lots (21%) and commercial real estate (14%).

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

Subsequent to September 30, 2008, three loans relationships totaling approximately $10 million were delinquent in payment of
scheduled interest payments and there was some uncertainty as to whether payment would be received. The Company feels that if uncorrected, the relationships will become nonperforming prior to the end of the next reporting period. The loans are
secured by real property that fully secured the loans at their origination, but at the time of this filing the Company does not have a current appraisal to determine if there has been deterioration in the underlying collateral values.



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During the third quarter, the Company took additional action with regard to the administration of nonperforming assets.
The Bank created a Special Assets Division to manage and administer the Banks portfolio of nonperforming loans and to enhance the liquidation of owned real estate. The Bank has engaged an experienced manager for this department who has over 35
years of banking experience, including substantial time spent in special asset administration.



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There are no loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not
been included in the table above and which represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources.

Information regarding certain loans and allowance for loan loss data through September 30, 2008 and 2007 is as follows:



|                                                                              |                        |                                |         |      |  |   |         |  
|----------------------------------------------------------------------------- | ---------------------- | ------------------------------ | ------- | ---- |  | - | ------- | -
|                                                                              |                        | Nine Months EndedSeptember 30, |        
|                                                                              | 2008                   |                                |         | 2007 | 
|                                                                              | (Dollars in Thousands) |                               
|Average amount of loans outstanding                                           |                        | $                              | 560,458 |      |  | $ | 561,574 |  
|                                                                              |                        |                                |         |      |  |   |         |  
|Balance of allowance for loan losses at beginning of period                   |                        | $                              | 7,657   |      |  | $ | 5,230   |  
|                                                                              |                        |                                |         |      |  |   |         |  
|Loans charged off                                                             |                        |                                |         |      |  |   |         |  
|Real estate                                                                   |                        |                                | (555    | )    |  |   | (186    | )
|Commercial                                                                    |                        |                                | (10     | )    |  |   | (14     | )
|Consumer installment                                                          |                        |                                | (29     | )    |  |   | (44     | )
|                                                                              |                        |                                |         |      |  |   |         |  
|                                                                              |                        |                                | (594    | )    |  |   | (244    | )
|                                                                              |                        |                                |         |      |  |   |         |  
|Loans recovered                                                               |                        |                                |         |      |  |   |         |  
|Real estate                                                                   |                        |                                | 1       |      |  |   | 1       |  
|Commercial                                                                    |                        |                                |        |      |  |   | 1       |  
|Consumer installment                                                          |                        |                                | 2       |      |  |   | 11      |  
|                                                                              |                        |                                |         |      |  |   |         |  
|                                                                              |                        |                                | 3       |      |  |   | 13      |  
|                                                                              |                        |                                |         |      |  |   |         |  
|Net (charge-offs)/ recoveries                                                 |                        |                                | (591    | )    |  |   | (231    | )
|                                                                              |                        |                                |         |      |  |   |         |  
|Additions to allowance charged to operating expense during period             |                        |                                | 8,286   |      |  |   | 1,434   |  
|                                                                              |                        |                                |         |      |  |   |         |  
|Balance of allowance for loan losses at end of period                         |                        | $                              | 15,352  |      |  | $ | 6,433   |  
|                                                                              |                        |                                |         |      |  |   |         |  
|Ratio of net loans charged off during the period to average loans outstanding |                        |                                | .11     | %    |  |   | .04     | %
|                                                                              |                        |                                |         |      |  |   |         |  

The allowance for loan losses is maintained at a level that is deemed appropriate by us to adequately cover all
known and inherent risks in the loan portfolio. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be
accurate. In assessing the adequacy, management relies predominately on its ongoing review of the loan portfolio. This review takes into consideration the judgments of the responsible lending officers and senior management, and also those of
regulatory agencies that review the loan portfolio as part of the regular bank examination process, as well as reviews conducted by our outside loan review firm. In evaluating the allowance, management also considers our loan loss experience, the
amount of past due and nonperforming loans, current and anticipated economic conditions, lender requirements and other appropriate information.



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Certain performing and nonperforming loans are individually assessed for impairment under Statement of Financial
Accounting Standards (SFAS) No. 114 and assigned specific allocations. Impaired loans at September 30, 2008 totaled $72.2 million of which $61.8 million have specific loss allocations of $11.8 million recorded.

Noninterest income

Other income decreased by $66,000 and $188,000 in the
third quarter and first nine months of 2008, respectively, as compared to the same periods in 2007. The year-to-date decreases are due primarily to a decrease in other service charges and fees of $29,000, as well as decreased mortgage banking income
of $177,000 as a result of decreased mortgage activity.

Noninterest expense

Other expenses have increased by $630,000 in the third quarter of 2008 and have increased $1,874,000 for the first nine months of 2008 as compared to the same periods in 2007. Other expenses have increased during the
first nine months of 2008 compared to 2007 primarily as a result of significant real estate writedowns and other losses of $1,845,000. Other expenses also increased as a result of increased occupancy and equipment expense of $34,000. The increase in
occupancy and equipment expense is primarily attributed to increased depreciation expense of $13,000. Salaries and employee benefits, net of capitalized loan fees, have decreased slightly for the first nine months of 2008 as compared to the same
period in 2007.

Income Taxes

Income tax expense (benefit)
totaled ($1.8 million) and $936,000 for the three month periods ended September 30, 2008 and 2007, respectively. The effective tax rates for the 2008 and 2007 quarters were approximately 41.1% and 36.1%, respectively. Income tax (benefit)
expense totaled ($1.7 million) for the nine month period ended September 30, 2008 compared to $4.5 million for the nine month period ended September 30, 2007.

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



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

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

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

We use a third party simulation model to monitor changes in net interest income due to changes in market
rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market
value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The third quarter model reflects an increase of 30% in net interest income and a 6% increase in market value equity for a 200 basis point
increase in rates. The same model shows a 4% decrease in net interest income and a 14% decrease in market value equity for a 200 basis point decrease in rates. Our investment committee monitors changes on a quarterly basis, measures the changing
values based on the models performance and determines an appropriate interest rate policy for management to follow in order to minimize the impact on earnings and market value equity in the projected rate environment.



|ITEM 4. | Controls and Procedures
|------- | -----------------------

As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective. In connection with the new rules, we are in the process of further reviewing
and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with
our business.

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



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II - OTHER INFORMATION



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



| | (a) | Exhibits.
| | --- | ---------



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



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|      |  |                   |  |                               |  |                                              
|----- |  | ----------------- |  | ----------------------------- |  | ---------------------------------------------
|      |  |                   |  | HENRY COUNTY BANCSHARES, INC.
|      |  |                   |  | (Registrant)                 
|      |  |                   | 
|DATE: |  | November 10, 2008 |  | BY:                           |  | /s/ David H. Gill                            
|      |  |                   |  |                               |  | David H. Gill, President and CEO             
|      |  |                   |  |                               |  | (Principal Executive Officer)                
|      |  |                   | 
|DATE: |  | November 10, 2008 |  | BY:                           |  | /s/ Thomas L. Redding                        
|      |  |                   |  |                               |  | Thomas L. Redding, Sr. Vice President and CFO
|      |  |                   |  |                               |  | (Principal Financial and Accounting Officer) 



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