##### 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, 2009



| ̈ | 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files.)    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See 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 October 30, 2009: 14,245,690; $2.50 par value.









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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

INDEX



|         |  |                                                                                                          |  |      
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | -----
|         |  |                                                                                                          |  | Page 
|PART I.  |  | FINANCIAL INFORMATION                                                                                    |  |      
|         |  |                                                                                                         
|         |  | Item 1. Financial Statements                                                                             |  |      
|         |  |                                                                                                         
|         |  | Consolidated Balance Sheets - September 30, 2009 and December 31,
2008                                   |  | 3    
|         |  |                                                                                                         
|         |  | Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2009 and
2008          |  | 4    
|         |  |                                                                                                         
|         |  | Consolidated Statements of Comprehensive Loss - Three and Nine Months Ended September 
30, 2009 and 2008 |  | 5    
|         |  |                                                                                                         
|         |  | Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008                    |  | 6-7  
|         |  |                                                                                                         
|         |  | Notes to Consolidated Financial Statements                                                               |  | 8-19 
|         |  |                                                                                                         
|         |  | Item 
2. Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 20-32
|         |  |                                                                                                         
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                       |  | 32   
|         |  |                                                                                                         
|         |  | Item 4. Controls and Procedures                                                                          |  | 33   
|         |  |                                                                                                         
|PART II. |  | OTHER INFORMATION                                                                                        |  |      
|         |  |                                                                                                         
|         |  | Item 6 - Exhibits and Reports on Form 8-K                                                                |  | 34   
|         |  |                                                                                                         
|         |  | Signatures                                                                                               |  | 35   



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##### Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2009 and December 31, 2008

(Unaudited)



|                                                                                        |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in thousands, except share and per share amounts)                                      |  | 2009 |         |   | 2008 |  
|Assets                                                                                  |  |      |         |   |      |   |         |  
|Cash and due from banks                                                                 |  | $    | 11,031  |   |      | $ | 14,039  |  
|Interest bearing deposits in banks                                                      |  |      | 43,377  |   |      |   | 1,500   |  
|Federal funds sold                                                                      |  |      |        |   |      |   | 14,300  |  
|Securities available for sale, at fair value                                            |  |      | 72,062  |   |      |   | 60,456  |  
|Securities held to maturity, at cost, (fair value 2009 $702; 2008 $3,350)               |  |      | 695     |   |      |   | 3,361   |  
|Restricted equity securities, at cost                                                   |  |      | 1,266   |   |      |   | 1,643   |  
|Loans held for sale                                                                     |  |      | 237     |   |      |   |        |  
|                                                                                        |  |     
|Loans                                                                                   |  |      | 482,784 |   |      |   | 533,608 |  
|Less allowance for loan losses                                                          |  |      | 14,571  |   |      |   | 17,730  |  
|                                                                                        |  |      |         |   |      |   |         |  
|Loans, net                                                                              |  |      | 468,213 |   |      |   | 515,878 |  
|                                                                                        |  |     
|Premises and equipment                                                                  |  |      | 9,621   |   |      |   | 9,776   |  
|Foreclosed properties                                                                   |  |      | 35,903  |   |      |   | 18,398  |  
|Other assets                                                                            |  |      | 10,033  |   |      |   | 16,526  |  
|                                                                                        |  |      |         |   |      |   |         |  
|                                                                                        |  |     
|Total assets                                                                            |  | $    | 652,438 |   |      | $ | 655,877 |  
|                                                                                        |  |      |         |   |      |   |         |  
|                                                                                        |  |     
|Liabilities and Stockholders Equity                                                    |  |      |         |   |      |   |         |  
|                                                                                        |  |     
|Deposits                                                                                |  |      |         |   |      |   |         |  
|Noninterest-bearing                                                                     |  | $    | 67,794  |   |      | $ | 68,210  |  
|Interest-bearing                                                                        |  |      | 540,537 |   |      |   | 522,266 |  
|                                                                                        |  |      |         |   |      |   |         |  
|Total deposits                                                                          |  |      | 608,331 |   |      |   | 590,476 |  
|                                                                                        |  |     
|Other borrowings                                                                        |  |      | 1,412   |   |      |   | 2,598   |  
|Other liabilities                                                                       |  |      | 2,916   |   |      |   | 3,460   |  
|                                                                                        |  |      |         |   |      |   |         |  
|Total liabilities                                                                       |  |      | 612,659 |   |      |   | 596,534 |  
|                                                                                        |  |      |         |   |      |   |         |  
|                                                                                        |  |     
|Stockholders equity                                                                    |  |      |         |   |      |   |         |  
|Preferred stock, no par value; 10,000,000 shares authorized; none issued                |  |      |         |   |      |   |         |  
|Common stock, par value $2.50; 30,000,000 shares authorized; 14,388,749.6 shares issued |  |      | 35,972  |   |      |   | 35,972  |  
|Capital surplus                                                                         |  |      | 740     |   |      |   | 740     |  
|Retained earnings                                                                       |  |      | 4,391   |   |      |   | 24,161  |  
|Accumulated other comprehensive income                                                  |  |      | 995     |   |      |   | 789     |  
|Treasury stock, 143,060 shares                                                          |  |      | (2,319  | ) |      |   | (2,319  | )
|                                                                                        |  |      |         |   |      |   |         |  
|Total stockholders equity                                                              |  |      | 39,779  |   |      |   | 59,343  |  
|                                                                                        |  |      |         |   |      |   |         |  
|                                                                                        |  |     
|Total liabilities and stockholders equity                                              |  | $    | 652,438 |   |      | $ | 655,877 |  
|                                                                                        |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements



3



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)



|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|(in thousands, except shares and per share data)           |  | 2009                            |            |   | 2008                           |   |            | 2009 |  |   | 2008       |  
|Interest income                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loans                                                      |  | $                               | 5,084      |   |                                | $ | 7,785      |      |  | $ | 14,278     |   |  | $ | 25,377     |  
|Taxable securities                                         |  |                                 | 603        |   |                                |   | 826        |      |  |   | 1,796      |   |  |   | 2,863      |  
|Nontaxable securities                                      |  |                                 | 74         |   |                                |   | 98         |      |  |   | 207        |   |  |   | 264        |  
|Deposits in banks                                          |  |                                 | 25         |   |                                |   | 1          |      |  |   | 39         |   |  |   | 34         |  
|Federal funds sold                                         |  |                                 | 10         |   |                                |   | 24         |      |  |   | 20         |   |  |   | 166        |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                      |  |                                 | 5,796      |   |                                |   | 8,734      |      |  |   | 16,340     |   |  |   | 28,704     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Interest expense                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Deposits                                                   |  |                                 | 3,728      |   |                                |   | 4,497      |      |  |   | 11,354     |   |  |   | 15,245     |  
|Other borrowings                                           |  |                                 | 13         |   |                                |   | 60         |      |  |   | 41         |   |  |   | 204        |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total interest expense                                     |  |                                 | 3,741      |   |                                |   | 4,557      |      |  |   | 11,395     |   |  |   | 15,449     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Net interest income                                        |  |                                 | 2,055      |   |                                |   | 4,177      |      |  |   | 4,945      |   |  |   | 13,255     |  
|Provision for loan losses                                  |  |                                 | 378        |   |                                |   | 5,650      |      |  |   | 14,319     |   |  |   | 8,286      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net interest income (loss) after provision for loan losses |  |                                 | 1,677      |   |                                |   | (1,473     | )    |  |   | (9,374     | ) |  |   | 4,969      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Other operating income                                     |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Service charges on deposit accounts                        |  |                                 | 457        |   |                                |   | 345        |      |  |   | 1,116      |   |  |   | 1,021      |  
|Other service charges and fees                             |  |                                 | 255        |   |                                |   | 257        |      |  |   | 656        |   |  |   | 778        |  
|Mortgage banking income                                    |  |                                 | 120        |   |                                |   | 72         |      |  |   | 374        |   |  |   | 314        |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                         |  |                                 | 832        |   |                                |   | 674        |      |  |   | 2,146      |   |  |   | 2,113      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Other expenses                                             |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                             |  |                                 | 1,670      |   |                                |   | 1,808      |      |  |   | 5,112      |   |  |   | 5,714      |  
|Occupancy and equipment expenses                           |  |                                 | 447        |   |                                |   | 495        |      |  |   | 1,308      |   |  |   | 1,462      |  
|Foreclosed properties, net                                 |  |                                 | 619        |   |                                |   | 958        |      |  |   | 2,890      |   |  |   | 1,976      |  
|FDIC and regulatory                                        |  |                                 | 456        |   |                                |   | 138        |      |  |   | 1,168      |   |  |   | 389        |  
|Other operating expenses                                   |  |                                 | 360        |   |                                |   | 233        |      |  |   | 2,064      |   |  |   | 1,180      |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total other expenses                                       |  |                                 | 3,552      |   |                                |   | 3,632      |      |  |   | 12,542     |   |  |   | 10,721     |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Loss before income taxes                                   |  |                                 | (1,043     | ) |                                |   | (4,431     | )    |  |   | (19,770    | ) |  |   | (3,639     | )
|                                                           |  |                                 |            |  
|Income tax expense (benefit)                               |  |                                 |           |   |                                |   | (1,820     | )    |  |   |           |   |  |   | (1,682     | )
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Net loss                                                   |  | $                               | (1,043     | ) |                                | $ | (2,611     | )    |  | $ | (19,770    | ) |  | $ | (1,957     | )
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Loss per share                                             |  | $                               | (0.07      | ) |                                | $ | (0.18      | )    |  | $ | (1.39      | ) |  | $ | (0.14      | )
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Weighted average shares outstanding                        |  |                                 | 14,245,690 |   |                                |   | 14,245,690 |      |  |   | 14,245,690 |   |  |   | 14,245,723 |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                           |  |                                 |            |  
|Cash dividends per share                                   |  | $                               |           |   |                                | $ | 0.03       |      |  | $ |           |   |  | $ | 0.15       |  
|                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes to consolidated financial statements



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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(Unaudited)



|                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                    |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(in thousands)                                                                                      |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|Net loss                                                                                            |  | $                               | (1,043 | ) |                                | $ | (2,611 | )    |  | $ | (19,770 | ) |  | $ | (1,957 | )
|                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|Other comprehensive income (loss), net of tax                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|Unrealized holding gains (losses) on investment securities available for sale arising during period |  |                                 | 624    |   |                                |   | 370    |      |  |   | 312     |   |  |   | (583   | )
|                                                                                                    |  |                                 |        |  
|Associated tax benefit (expense)                                                                    |  |                                 | (212   | ) |                                |   | (126   | )    |  |   | (106    | ) |  |   | 198    |  
|                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|Total other comprehensive income (loss), net of tax                                                 |  |                                 | 412    |   |                                |   | 244    |      |  |   | 206     |   |  |   | (385   | )
|                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|Total comprehensive loss                                                                            |  | $                               | (631   | ) |                                | $ | (2,367 | )    |  | $ | (19,564 | ) |  | $ | (2,342 | )
|                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

See accompanying notes to consolidated financial statements



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |        
|(in thousands)                                                                  |  | 2009                           |         |   | 2008 |  
|Operating Activities                                                            |  |                                |         |   |      |   |         |  
|Net Loss                                                                        |  | $                              | (19,770 | ) |      | $ | (1,957  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation                                                                    |  |                                | 397     |   |      |   | 515     |  
|Net (increase) decrease in loans held for sale                                  |  |                                | (237    | ) |      |   | 856     |  
|Provision for loan losses                                                       |  |                                | 14,319  |   |      |   | 8,286   |  
|Writedowns of other real estate owned                                           |  |                                | 1,558   |   |      |   | 1,600   |  
|Writedowns of restricted equity securities                                      |  |                                | 275     |   |      |   |        |  
|Net losses on sale of other real estate                                         |  |                                | 642     |   |      |   | 245     |  
|Decrease in interest receivable                                                 |  |                                | 575     |   |      |   | 2,286   |  
|Decrease in interest payable                                                    |  |                                | (693    | ) |      |   | (948    | )
|Net other operating activities                                                  |  |                                | 5,961   |   |      |   | (3,157  | )
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Net cash provided by operating activities                                       |  |                                | 3,027   |   |      |   | 7,726   |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Investing Activities                                                            |  |                                |         |   |      |   |         |  
|Purchases of securities available for sale                                      |  |                                | (46,433 | ) |      |   | (42,404 | )
|Proceeds from maturities of securities available for sale                       |  |                                | 35,139  |   |      |   | 53,400  |  
|Proceeds from maturities of securities held to maturity                         |  |                                | 2,666   |   |      |   | 403     |  
|Retirement of restricted equity securities                                      |  |                                | 102     |   |      |   | 20      |  
|Net decrease (increase) in federal funds sold                                   |  |                                | 14,300  |   |      |   | (2,800  | )
|Net (increase) decrease in interest-bearing deposits in banks                   |  |                                | (41,877 | ) |      |   | 2,173   |  
|Net decrease in loans                                                           |  |                                | 8,224   |   |      |   | 13,081  |  
|Additions to foreclosed properties                                              |  |                                | (100    | ) |      |   |        |  
|Proceeds from sale of other real estate                                         |  |                                | 5,517   |   |      |   | 1,266   |  
|Purchase of premises and equipment                                              |  |                                | (242    | ) |      |   | (65     | )
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Net cash (used in) provided by investing activities                             |  |                                | (22,704 | ) |      |   | 25,074  |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Financing Activities                                                            |  |                                |         |   |      |   |         |  
|Net increase (decrease) in deposits                                             |  |                                | 17,855  |   |      |   | (25,422 | )
|Net repayments of other borrowings                                              |  |                                | (1,186  | ) |      |   | (5,899  | )
|Dividends paid                                                                  |  |                                |        |   |      |   | (2,137  | )
|Purchase of treasury stock                                                      |  |                                |        |   |      |   | (61     | )
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Net cash provided by (used in) financing activities                             |  |                                | 16,669  |   |      |   | (33,519 | )
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Net decrease in cash and due from banks                                         |  |                                | (3,008  | ) |      |   | (719    | )
|                                                                                |  |                               
|Cash and due from banks, beginning of period                                    |  |                                | 14,039  |   |      |   | 16,826  |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Cash and due from banks, end of period                                          |  | $                              | 11,031  |   |      | $ | 16,107  |  
|                                                                                |  |                                |         |   |      |   |         |  

See accompanying notes to consolidated financial statements



6



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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)



|                                                  |  |                                |        |   |      |   |       
|------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------
|                                                  |  | Nine Months EndedSeptember 30,
|(in thousands)                                    |  | 2009                           |        |   | 2008
|Supplemental Disclosures of Cash Flow Information |  |                                |        |   |      |   |       
|Cash paid (received) for:                         |  |                                |        |   |      |   |       
|Interest                                          |  | $                              | 12,088 |   |      | $ | 16,397
|                                                  |  |                               
|Income taxes                                      |  | $                              | (6,122 | ) |      | $ | 1,340 
|                                                  |  |                               
|Noncash transactions                              |  |                                |        |   |      |   |       
|Other real estate acquired in settlement of loans |  | $                              | 25,370 |   |      | $ | 8,342 
|                                                  |  |                               
|Financed sales of other real estate owned         |  | $                              | 248    |   |      | $ | 815   

See accompanying notes to consolidated financial statements



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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



|1) | BASIS OF PRESENTATION
|-- | ---------------------

The consolidated financial information for Henry County Bancshares, Inc. (the Company) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of results for the interim period. Certain amounts at September 2009 and 2008 and for the nine months ended thereon and December 2008 have been reclassified to conform to the
September 2009 presentation.

The results of operations for the three and nine month periods ended September 30, 2009 are
not necessarily indicative of the results to be expected for the full year.



|2) | RESTATEMENT
|-- | -----------

On
November 12, 2009, management and the Audit Committee of the Board of Directors of the Company, after consultation with its independent accountants, determined that the Company had incorrectly recorded its provision for loan losses for the
three and six month periods ended June 30, 2009. During the second quarter of 2009, management changed the period considered in determining its historical loss experience used for estimating the general portion of the Companys allowance
for loan losses from the most recent five years to the most recent six quarters. In making the change the Company incorrectly applied a quarterly average loss rate rather than an annual loss rate when calculating the general portion of its allowance
for loan losses at June 30, 2009. The result of this error was that the provision for loan losses and the net loss of the Company for the three and six month periods ended June 30, 2009 were understated by $6.2 million along with the
allowance for loan losses which was also understated by $6.2 million at June 30, 2009.

The following presents the amounts
originally reported in the Companys June 30, 2009 Quarterly Report on Form 10Q that are affected by the restatement.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|2) | RESTATEMENT, continued
|-- | ----------------------



|                                           |  |                                     |         |            |   |        
|------------------------------------------ |  | ----------------------------------- | ------- | ---------- | - | -------
|                                           |  | Impact toConsolidated Balance Sheet
|                                           |  | (unaudited)                        
|                                           |  | As PreviouslyReported               |         | AsRestated
|                                           |  | (in thousands)                     
|Loans                                      |  | $                                   | 496,473 |            | $ | 496,473
|Less allowance for loan losses             |  |                                     | 9,006   |            |   | 15,171 
|                                           |  |                                     |         |            |   |        
|Loans, net                                 |  |                                     | 487,467 |            |   | 481,302
|Total assets                               |  |                                     | 679,843 |            |   | 673,678
|Total stockholders equity                 |  |                                     | 46,574  |            |   | 40,409 
|Total liabilities and stockholders equity |  |                                     | 679,843 |            |   | 673,678



|                                                           |  |                                                 |         |   |                               |   |         |                       |  |   |            |   |  |   |         |  
|---------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ----------------------------- | - | ------- | --------------------- |  | - | ---------- | - |  | - | ------- | -
|                                                           |  | Impact to Consolidated Statements of Operations |        
|                                                           |  | (unaudited)                                     |        
|                                                           |  | Three Months EndedJune 30, 2009                 |         |   | Six Months EndedJune 30, 2009 |  
|                                                           |  | As PreviouslyReported                           |         |   | AsRestated                    |   |         | As PreviouslyReported |  |   | AsRestated |  
|                                                           |  | (in thousands)                                  |        
|Provision for loan losses                                  |  | $                                               | 6,175   |   |                               | $ | 12,340  |                       |  | $ | 7,775      |   |  | $ | 13,940  |  
|Net interest income (loss) after provision for loan losses |  |                                                 | (6,061  | ) |                               |   | (12,226 | )                     |  |   | (4,954     | ) |  |   | (11,119 | )
|Loss before income taxes                                   |  |                                                 | (10,186 | ) |                               |   | (16,351 | )                     |  |   | (12,563    | ) |  |   | (18,728 | )
|Net loss                                                   |  |                                                 | (10,186 | ) |                               |   | (16,351 | )                     |  |   | (12,563    | ) |  |   | (18,728 | )
|Loss per share                                             |  | $                                               | (0.72   | ) |                               | $ | (1.15   | )                     |  | $ | (0.88      | ) |  | $ | (1.31   | )



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|3) | ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
|-- | -----------------------------------------

In April 2009, the FASB issued three related accounting pronouncements to provide further application guidance and enhanced disclosures of fair value measurements and impairments of securities. These
pronouncements provide guidance for making fair value measurements more consistent with existing accounting principles when the volume and level of activity for the asset or liability have significantly decreased. The pronouncements also enhance
consistency in reporting by increasing the frequency of fair value disclosures and modifies existing general accounting standards for and disclosure of other-than-temporary (OTTI) losses for impaired debt securities.

The fair value measurement guidance of these pronouncements reaffirms the need for entities to use judgment in determining if a formerly
active market has become inactive and in determining fair values when markets have become inactive. Prior to these pronouncements, fair value disclosures for instruments covered by the pronouncements were required for annual statements only. These
disclosures are now required in interim financial statements. The general standards of accounting for OTTI losses were changed to require the recognition of an OTTI loss in earnings only when an entity (1) intends to sell the debt security;
(2) more likely than not will be required to sell the security before recovery of its amortized cost basis; or (3) does not expect to recover the entire amortized cost basis of the security. When an entity intends to sell or more likely
than not will be required to sell a security, the entire OTTI loss must be recognized in earnings. In all other situations, only the portion of the OTTI losses representing the credit loss must be recognized in earnings, with the remaining portion
being recognized in other comprehensive income, net of deferred taxes.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|3) | ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS, continued
|-- | ----------------------------------------------------



All three pronouncements were effective for interim and annual reports ending after
June 15, 2009. Early adoption was permitted for interim and annual periods ending after March 15, 2009, but concurrent adoption of all three was required. The Company adopted the provisions of these pronouncements for the quarter ending
June 30, 2009. The adoption of these provisions did not have an impact on the consolidated financial statements.

In May
2009, the FASB issued an accounting pronouncement establishing general standards of accounting for and disclosure of subsequent events. The pronouncement defines recognized subsequent events as those that give evidence of conditions that
existed at the balance-sheet date and non-recognized subsequent events as those that provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements. Entities must recognize
in the financial statements the effect of recognized subsequent events, but cannot recognize the effects in the financial statements of non-recognized subsequent events. This pronouncement also requires entities to disclose the date through which
subsequent events have been evaluated. This pronouncement was effective for interim and annual periods ending after June 30, 2009. The Company adopted this pronouncement for the quarter ended June 30, 2009, and adoption did not have an
impact on the consolidated financial statements.

In June 2009, the FASB issued an accounting pronouncement establishing the
FASB Accounting Standards CodificationTM (the ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities. This pronouncement was effective for financial
statements issued for interim and annual periods ending after September 30, 2009. On the effective date, this pronouncement superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification became non-authoritative. The Company adopted this new accounting pronouncement effective September 30, 2009. There was no impact on the consolidated financial statements from the adoption of this
pronouncement.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|4) | SECURITIES
|-- | ----------

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



|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|---------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                   |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                   |  | (in thousands)
|Securities Available for Sale      |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|September 30, 2009:                |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|U.S. Government sponsored agencies |  | $              | 29,849 |                      | $ | 246                   |  | $ | (52                | ) |  | $ | 30,042
|State and municipal securities     |  |                | 8,045  |                      |   | 147                   |  |   |                   |   |  |   | 8,192 
|Mortgage-backed securities         |  |                | 32,661 |                      |   | 1,193                 |  |   | (27                | ) |  |   | 33,828
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $              | 70,555 |                      | $ | 1,586                 |  | $ | (79                | ) |  | $ | 72,062
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |                |        |                     
|December 31, 2008:                 |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|U.S. Government sponsored agencies |  | $              | 25,720 |                      | $ | 343                   |  | $ |                   |   |  | $ | 26,063
|State and municipal securities     |  |                | 6,035  |                      |   | 94                    |  |   | (8                 | ) |  |   | 6,121 
|Mortgage-backed securities         |  |                | 27,506 |                      |   | 848                   |  |   | (82                | ) |  |   | 28,272
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $              | 59,261 |                      | $ | 1,285                 |  | $ | (90                | ) |  | $ | 60,456
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |                |        |                     
|                                   |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                   |  | (in thousands)
|Securities Held to Maturity        |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|September 30, 2009:                |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|State and municipal securities     |  | $              | 695    |                      | $ | 11                    |  | $ | (4                 | ) |  | $ | 702   
|Mortgage-backed securities         |  |                |       |                      |   |                      |  |   |                   |   |  |   |      
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $              | 695    |                      | $ | 11                    |  | $ | (4                 | ) |  | $ | 702   
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |                |        |                     
|December 31, 2008:                 |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|State and municipal securities     |  | $              | 3,360  |                      | $ | 15                    |  | $ | (26                | ) |  | $ | 3,349 
|Mortgage-backed securities         |  |                | 1      |                      |   |                      |  |   |                   |   |  |   | 1     
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $              | 3,361  |                      | $ | 15                    |  | $ | (26                | ) |  | $ | 3,350 
|                                   |  |                |        |                      |   |                       |  |   |                    |   |  |   |       



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|4) | SECURITIES, continued
|-- | ---------------------



Restricted equity securities are summarized as follows:



|                             |  |                   |       |                  |   |      
|---------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                             |  | September 30,2009 |       | December 31,2008
|                             |  | (in thousands)   
|Federal Home Loan Bank stock |  | $                 | 1,266 |                  | $ | 1,368
|Correspondent Bank Stock     |  |                   |      |                  |   | 275  
|                             |  |                   |       |                  |   |      
|                             |  | $                 | 1,266 |                  | $ | 1,643
|                             |  |                   |       |                  |   |      

Securities with a carrying value of $22,055,000 at September 30, 2009 and
$31,500,000 at December 31, 2008 were pledged to secure public deposits and for other purposes required or permitted by law.

There were no sales of securities available for sale for the nine months ended September 30, 2009 or for the year ended December 31, 2008.

The amortized cost and fair value of debt securities as of September 30, 2009 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.



|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|-------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------------- |  | ------------------- | --- |  | - | ---
|                                       |  | SecuritiesAvailable for
Sale |        | Securities Heldto Maturity
|                                       |  | AmortizedCost                |        | EstimatedFair Value        |   | AmortizedCost |  | EstimatedFair Value
|                                       |  | (in thousands)              
|Due in one year or less                |  | $                            | 4,460  |                            | $ | 4,515         |  | $                   |    |  | $ |   
|Due after one year through five years  |  |                              | 20,814 |                            |   | 21,009        |  |                     | 695 |  |   | 702
|Due after five years through ten years |  |                              | 12,320 |                            |   | 12,389        |  |                     |    |  |   |   
|After ten years                        |  |                              | 300    |                            |   | 321           |  |                     |    |  |   |   
|Mortgage-backed securities             |  |                              | 32,661 |                            |   | 33,828        |  |                     |    |  |   |   
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|                                       |  | $                            | 70,555 |                            | $ | 72,062        |  | $                   | 695 |  | $ | 702
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    

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



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|4) | SECURITIES, continued
|-- | ---------------------



Information pertaining to securities with gross unrealized losses at September 30,
2009 and December 31, 2008 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:



|                                      |  |                     |       |                   |   |           |  |                  |       |  |   |   
|------------------------------------- |  | ------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ----- |  | - | --
|                                      |  | Less Than 12 Months |       | 12 Months or More
|                                      |  | FairValue           |       | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses
|                                      |  | (in thousands)     
|September 30, 2009                    |  |                     |       |                   |   |           |  |                  |       |  |   |   
|U.S. Government sponsored agencies    |  | $                   | 4,445 |                   | $ | 52        |  | $                |      |  | $ |  
|State and municipal securities        |  |                     |      |                   |   |          |  |                  | 246   |  |   | 4 
|Mortgage-backed securities            |  |                     | 2,059 |                   |   | 2         |  |                  | 1,292 |  |   | 25
|                                      |  |                     |       |                   |   |           |  |                  |       |  |   |   
|Total temporarily impaired securities |  | $                   | 6,504 |                   | $ | 54        |  | $                | 1,538 |  | $ | 29
|                                      |  |                     |       |                   |   |           |  |                  |       |  |   |   
|                                      |  |                     |       |                  
|December 31, 2008                     |  |                     |       |                   |   |           |  |                  |       |  |   |   
|U.S. Government sponsored agencies    |  | $                   |      |                   | $ |          |  | $                |      |  | $ |  
|State and municipal securities        |  |                     | 198   |                   |   | 8         |  |                  | 574   |  |   | 26
|Mortgage-backed securities            |  |                     | 2,996 |                   |   | 37        |  |                  | 843   |  |   | 45
|                                      |  |                     |       |                   |   |           |  |                  |       |  |   |   
|Total temporarily impaired securities |  | $                   | 3,194 |                   | $ | 45        |  | $                | 1,417 |  | $ | 71
|                                      |  |                     |       |                   |   |           |  |                  |       |  |   |   

The unrealized losses on the Companys investment in state and municipal
securities are caused by changes in interest rates. The Companys investments in state and municipal securities consist primarily of general obligations of municipalities located in the state of Georgia. Because the decline in market value is
attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to
be other-than-temporarily impaired at September 30, 2009 and December 31, 2008.

The unrealized losses on the
Companys investment in both direct obligations of federal agencies and mortgage-backed securities guaranteed by federal agencies were also caused by changes in interest rates. The Company purchased most of these investments at a discount
relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of
the Companys investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value,
which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2009 and December 31, 2008.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|5) | FAIR VALUE OF FINANCIAL INSTRUMENTS
|-- | -----------------------------------

Measurement of fair value under United States generally accepted accounting principles (US GAAP) establishes a hierarchy that prioritizes observable and unobservable inputs used to measure
fair value, as of the measurement date, into three broad levels, which are described below.

Level 1Quoted prices in
active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities traded in an active market, as well as certain U.S. Treasury and U.S. Government-sponsored enterprise debt securities that are
highly liquid and are actively traded in over-the-counter markets.

Level 2Observable inputs other than Level 1 prices
such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and
liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are
observable in the market or can be derived principally from or corroborated by observable market data.

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

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible.

Securities available for sale

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1
securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Level 2 securities include U. S. agency securities, mortgage-backed agency securities, obligations of state and political subdivisions and certain corporate, asset backed and other securities. In certain
cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|5) | FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
|-- | ----------------------------------------------



Impaired Loans

Impaired loans are subject to nonrecurring fair value adjustment. Impaired loans are reported at fair value when the carrying amount exceeds
fair value. Fair value of impaired loans is determined based on the present value of estimated future cash flows using the loans existing rate or the fair value of the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the carrying amount. The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis
was $4.2 million for the nine months ended September 30, 2009. Impaired loans are classified within Level 3 of the hierarchy.

Foreclosed Properties

Foreclosed properties are held for sale and are initially recorded at fair value, and
subsequently carried at the lower of cost or fair value less selling costs. Any write-downs to fair value at the time of transfer to foreclosed properties are charged to the allowance for loan losses subsequent to foreclosure. Values are derived
from appraisals of underlying collateral and discounted cash flow analysis. The amount charged to earnings to adjust foreclosed properties to fair value amounted to $1.6 million for the nine months ended September 30, 2009, and $1.6 million for
the nine months ended September 30, 2008, respectively. Foreclosed properties are classified within Level 3 of the hierarchy.

The following table presents the fair value hierarchy of the Companys financial assets and financial liabilities measured at fair value as of September 30, 2009.



|                                         |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|---------------------------------------- |  | ----------------------------------------------- | ------- | ---------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ------ |  | - | -------
|                                         |  | Fair Value MeasurementsAs of September
30, 2009
|                                         |  | Fair Value                                      |         | Quoted Pricesin
ActiveMarkets forIdentical Assets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|                                         |  | (in thousands)                                 
|Assets Measured on a Recurring Basis:    |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|Securities available for sale            |  | $                                               | 72,062  |                                                            | $ | 2,528                                     |  | $                                      | 69,534 |  | $ |       
|                                         |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|Total assets at fair value               |  | $                                               | 72,062  |                                                            | $ | 2,528                                     |  | $                                      | 69,534 |  | $ |       
|                                         |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|Assets Measured on a Nonrecurring Basis: |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|Impaired loans carried at fair value     |  | $                                               | 80,603  |                                                            | $ |                                          |  | $                                      |       |  | $ | 80,603 
|Foreclosed assets                        |  |                                                 | 35,903  |                                                            |   |                                          |  |                                        |       |  |   | 35,903 
|                                         |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        
|Total assets at fair value               |  | $                                               | 116,506 |                                                            | $ |                                          |  | $                                      |       |  | $ | 116,506
|                                         |  |                                                 |         |                                                            |   |                                           |  |                                        |        |  |   |        



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|5) | FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
|-- | ----------------------------------------------



The fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current US GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure
requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The carrying amount and estimated fair value of the Companys financial instruments, including those that are not measured at fair value on a recurring basis or non-recurring basis, were as follows:



|                              |  |                    |         |                   |   |                |  |           |         |  |   |        
|----------------------------- |  | ------------------ | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                              |  | September 30, 2009 |         | December 31, 2008
|                              |  | CarryingAmount     |         | FairValue         |   | CarryingAmount |  | FairValue
|                              |  | (in thousands)    
|Financial assets:             |  |                    |         |                   |   |                |  |           |         |  |   |        
|Cash and cash equivalents     |  | $                  | 54,408  |                   | $ | 54,408         |  | $         | 29,839  |  | $ | 29,839 
|Securities available for sale |  |                    | 72,062  |                   |   | 72,062         |  |           | 60,456  |  |   | 60,456 
|Securities held to maturity   |  |                    | 695     |                   |   | 702            |  |           | 3,361   |  |   | 3,350  
|Restricted equity securities  |  |                    | 1,266   |                   |   | 1,266          |  |           | 1,643   |  |   | 1,643  
|Loans held for sale           |  |                    | 237     |                   |   | 237            |  |           |        |  |   |       
|Loans, net                    |  |                    | 468,213 |                   |   | 472,378        |  |           | 515,878 |  |   | 520,205
|Accrued interest receivable   |  |                    | 2,589   |                   |   | 2,589          |  |           | 3,164   |  |   | 3,164  
|                              |  |                    |         |                  
|Financial liabilities:        |  |                    |         |                   |   |                |  |           |         |  |   |        
|Deposits                      |  | $                  | 608,331 |                   | $ | 617,653        |  | $         | 590,476 |  | $ | 599,315
|Other borrowings              |  |                    | 1,412   |                   |   | 1,456          |  |           | 2,598   |  |   | 2,600  
|Accrued interest payable      |  |                    | 2,008   |                   |   | 2,008          |  |           | 2,701   |  |   | 2,701  



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|5) | FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
|-- | ----------------------------------------------



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

Cash and cash equivalents:The carrying amount of cash, due from banks,
interest-bearing deposits in banks and federal funds sold approximates fair values.

Securities:Fair values of
securities are based on available quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.

Loans and Loans Held For Sale:For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts. The fair value of other loans
(for example, fixed-rate commercial real estate loans, mortgage loans, and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair value for impaired loans is estimated using discounted cash flow analysis, or underlying collateral values, where
applicable.

Deposits:The carrying amount of demand deposits, savings deposits, and variable-rate certificates of
deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.

Repurchase Agreements and Other Borrowings:The carrying amount of variable rate borrowings and securities sold under repurchase
agreements approximate fair value. The fair value of fixed rate other borrowings are estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements.

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

Loan commitments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value and are
not significant. The carrying amount of the off-balance sheet financial instruments is based on fees charged to enter into such agreements.



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Notes to Consolidated Financial Statements, continued

(Unaudited)



|6) | SUBSEQUENT EVENTS
|-- | -----------------

Management has evaluated all significant events and transactions that occurred after September 30, 2009, but prior to November 12, 2009 the date these financial statements were available to be issued, for potential recognition or
disclosure in these financial statements.

On November 6, 2009, President Obama signed into law House Bill 3548. One
provision of the bill extends the net operating loss carryback period from the current two years to five years. As a result of this bill, the Company believes it will be able to utilize net operating losses to recoup income taxes paid in previous
years in addition to amounts that have been previously recorded. The amount of additional net operating loss carrybacks has not yet been determined, but the Company believes the utilization of such net operating losses will result in certain tax
benefits being recorded in the fourth quarter of 2009, which will reduce the Companys net loss.

There were no other
significant events that have not been disclosed that would materially impact the financial statements.



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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 subsidiary, The First State Bank (the Bank), 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, 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, 2008 as filed in our annual report on Form 10-K.

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



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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 the 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.

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. Our liquidity ratio at October 2, 2009 was 25.43%, which is indicative of the liquidity ratio we
have maintained on a recurring basis. 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, 2009, our FHLB borrowings and brokered deposits represented approximately 11.5% of our total funding (total deposits plus borrowed funds).

The regulatory minimum capital requirements to be classified as well-capitalized and our actual capital ratios on a consolidated and bank-only basis are as
follows:



|                           |  |              |   |  |      |   |  |                              |  
|-------------------------- |  | ------------ | - |  | ---- | - |  | ---------------------------- | -
|                           |  | Actual       |   |  |      |  
|                           |  | Consolidated |   |  | Bank |   |  | MinimumRegulatoryRequirement |  
|                           |  |              |  
|Leverage Capital Ratios    |  | 5.79         | % |  | 5.77 | % |  | 5.00                         | %
|Risk Based Capital Ratios: |  |              |   |  |      |   |  |                              |  
|Core Capital               |  | 7.42         | % |  | 7.39 | % |  | 6.00                         | %
|Total Capital              |  | 8.69         | % |  | 8.66 | % |  | 10.00                        | %

The Bank is below the Minimum Regulatory Requirement for Total Risk-based capital to be considered
well capitalized and is now considered adequately capitalized for regulatory purposes. Under the terms of the informal enforcement agreement with its primary regulators, the Company has an obligation to restore the bank to a minimum Leverage Capital
ratio of 8.00% and a minimum Risk-based total capital of 10.00%. The Company has adopted a Capital Policy and the Board has appointed a Capital Committee which is developing a plan to return the Company to the required levels.



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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 30,2009 |        | December 31,2008
|                             |  | (in thousands)   
|Standby letters of credit    |  | $                 | 2,765  |                  | $ | 6,259 
|Commitments to extend credit |  |                   | 44,306 |                  |   | 68,194
|                             |  |                   |        |                  |   |       
|                             |  | $                 | 47,071 |                  | $ | 74,453
|                             |  |                   |        |                  |   |       

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.

Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount
of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the customer.



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Financial Condition

Following is a summary of our balance sheets at the dates indicated:



|                              |  |                        |         |                  |   |        
|----------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                              |  | September 30,2009      |         | December 31,2008
|                              |  | (amounts in thousands)
|Cash and due from banks       |  | $                      | 11,031  |                  | $ | 14,039 
|Interest-bearing deposits     |  |                        | 43,377  |                  |   | 1,500  
|Federal funds sold            |  |                        |        |                  |   | 14,300 
|Securities available for sale |  |                        | 72,062  |                  |   | 60,456 
|Securities held to maturity   |  |                        | 695     |                  |   | 3,361  
|Restricted equity securities  |  |                        | 1,266   |                  |   | 1,643  
|Loans, net                    |  |                        | 468,213 |                  |   | 515,878
|Loans held for sale           |  |                        | 237     |                  |   |       
|Premises and equipment        |  |                        | 9,621   |                  |   | 9,776  
|Foreclosed properties         |  |                        | 35,903  |                  |   | 18,398 
|Other assets                  |  |                        | 10,033  |                  |   | 16,526 
|                              |  |                        |         |                  |   |        
|                              |  | $                      | 652,438 |                  | $ | 655,877
|                              |  |                        |         |                  |   |        
|Total deposits                |  |                        | 608,331 |                  |   | 590,476
|Other borrowings              |  |                        | 1,412   |                  |   | 2,598  
|Other liabilities             |  |                        | 2,916   |                  |   | 3,460  
|Stockholders equity          |  |                        | 39,779  |                  |   | 59,343 
|                              |  |                        |         |                  |   |        
|                              |  | $                      | 652,438 |                  | $ | 655,877
|                              |  |                        |         |                  |   |        

Our assets were static during the first nine months of 2009, decreasing by .52%. Net loans decreased
by $47.7 million, primarily due to the transfer of approximately $25.4 million to other real estate owned as a result of foreclosures during the first nine months of 2009 as well as the charge-off of $17.6 million in loans. The remaining decrease in
net outstanding loans are a result of normal pay down activity as we have experienced a continued slowing of new loan production during the first nine months of 2009. Total deposits increased $17.9 million during the first nine months of 2009. Of
that increase, $24.2 million was the result of a net increase in brokered deposits. The total amount of brokered deposits we had at September 30, 2009 amounted to $68.9 million or 11% of total deposits. With diminished loan demand, we have
sufficient liquidity to fund our balance sheet without relying on funding other than customer deposits. We do not plan on increasing our brokered certificates in the near future and have sufficient liquidity to pay off the brokered certificates as
they mature. We continue to pay down our advances from the Federal Home Loan Bank, which totaled $1.3 million at September 30, 2009, and we plan on repaying these advances in full when they mature in April 2010. Of the $6.3 million decline in



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customer deposits during the first nine months, $5.9 million was concentrated in interest bearing accounts, primarily customer certificates of deposit and money market accounts. We continue to
lower our deposit rates to reflect slowing demand on the asset side of the balance sheet, resulting in some customers moving funds to higher yielding investments.

Our total equity has decreased by $19.6 million for the nine months ended September 30, 2009 primarily due to an operating loss of $19.8 million offset by a $200,000 increase in unrealized gains in
the investment portfolio. The operating loss includes a provision to the allowance for loan losses in the amount of $14.3 million; $2.9 million in net losses relating to foreclosed properties, of which $1.5 million was attributable to adjusting the
carrying values to fair market value; and $2.3 million in the reversal of interest income on loans transferred to nonaccrual status and the reversal of interest earned in previous periods on disallowed lines of credit.

Results of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

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



|                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                          |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                          |  | 2009                            |        |   | 2008                           |   |        | 2009 |  |   | 2008    |  
|                          |  | (amounts in thousands)          |       
|Interest income           |  | $                               | 5,796  |   |                                | $ | 8,734  |      |  | $ | 16,340  |   |  |   | $28,704 |  
|Interest expense          |  |                                 | 3,741  |   |                                |   | 4,557  |      |  |   | 11,395  |   |  |   | 15,449  |  
|                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net interest income       |  |                                 | 2,055  |   |                                |   | 4,177  |      |  |   | 4,945   |   |  |   | 13,255  |  
|Provision for loan losses |  |                                 | 378    |   |                                |   | 5,650  |      |  |   | 14,319  |   |  |   | 8,286   |  
|Other income              |  |                                 | 832    |   |                                |   | 674    |      |  |   | 2,146   |   |  |   | 2,113   |  
|Other expense             |  |                                 | 3,552  |   |                                |   | 3,632  |      |  |   | 12,542  |   |  |   | 10,721  |  
|                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Pretax loss               |  |                                 | (1,043 | ) |                                |   | (4,431 | )    |  |   | (19,770 | ) |  |   | (3,639  | )
|Income taxes (benefit)    |  |                                 |       |   |                                |   | (1,820 | )    |  |   |        |   |  |   | (1,682  | )
|                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                  |  | $                               | (1,043 | ) |                                | $ | (2,611 | )    |  | $ | (19,770 | ) |  | $ | (1,957  | )
|                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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Our third quarter and year to date results continue to be defined by higher costs and lower margins
resulting from our increasing levels of nonperforming assets. The net loss for the third quarter totaled $1.0 million or $(.07) per share, compared to a net loss of $2.6 million or $(.18) per share for the third quarter 2008. Our net loss for the
nine months ended September 30, 2009 amounted to $19.8 million or $(1.39) per share compared to $2.0 million or $(.14) per share for the same period in 2008.

Our net interest income decreased by $2.1 million in the third quarter of 2009 compared to the same period in 2008. Our net interest margin on average interest-earning assets decreased to 1.30% in the
first nine months of 2009 as compared to 2.64% in the first nine months of 2008. Our increasing levels of nonperforming loans have negatively affected our net interest margin. We have reversed approximately $1.4 million in interest income on loans
placed on nonaccrual during the first nine months of 2009, effectively lowering our net interest margin on average earning assets by 32 basis points. In addition, we reversed interest earned in prior periods on disallowed lines of credit used to
support interest payments in the amount of $938,000, lowering our loan yield by an additional 31 basis points. Adjusted for these two interest reversals, our net interest margin was 2.24% for the first nine months of 2009. Net cost on
interest-bearing liabilities decreased to 2.79% during the first nine months of 2009 compared to 3.80% for the same period in 2008. The decrease in interest expense is largely the result of lower funding costs during the first nine months of 2009.

The provision for loan losses amounted to $378,000 and $14.3 million for the third quarter and first nine months of 2009, respectively. The
amounts provided are indicative of our assessment of the inherent risk in the loan portfolio at September 30, 2009. The allowance for loan losses as a percentage of total loans was 3.02% at September 30, 2009 as compared to 3.32% at
December 31, 2008. 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 beginning on page 30 for a further discussion of our
allowance for loan losses methodology.



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Our subsidiary bank is located in what has historically been one of the fastest growing areas of the United
States, south Metro Atlanta. A large number of our loans were to developers and contractors to purchase land, develop subdivisions and build houses to meet the growing population. The slowing economy has impacted many of our customers causing stress
in our portfolio. The following table shows the composition of our loan portfolio as of September 30, 2009 by type of loan and the amount of nonperforming loans in each category.



|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|------------------------------------------- |  | ---------------------- | ------- | - | -------------------------- | ----- | - | ------------------------ | - | ---------------------------- |  | ----- | -
|                                            |  | Total Loans            |         |   | % ofTotal loansOutstanding |       |   | TotalNon-performingLoans |   | % ofTotalNon-performingLoans | 
|                                            |  | (dollars in thousands) |        
|Loan type                                   |  |                        |         |  
|Residential construction and development    |  | $                      | 212,912 |   |                            | 44.1  | % |                          | $ | 78,251                       |  | 83.2  | %
|1-4 family residential loans - home equity  |  |                        | 8,480   |   |                            | 1.8   | % |                          |   | 122                          |  | 0.1   | %
|1-4 family residential loans - first liens  |  |                        | 51,299  |   |                            | 10.6  | % |                          |   | 8,746                        |  | 9.3   | %
|1-4 family residential loans - junior liens |  |                        | 875     |   |                            | 0.2   | % |                          |   | 1                            |  | 0.0   | %
|Commercial real estate                      |  |                        | 186,536 |   |                            | 38.6  | % |                          |   | 6,699                        |  | 7.2   | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|Total real estate loans                     |  |                        | 460,102 |   |                            | 95.3  | % |                          |   | 93,819                       |  | 99.8  | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|Commercial and industrial loans             |  |                        | 15,345  |   |                            | 3.2   | % |                          |   | 46                           |  | 0.0   | %
|Consumer loans                              |  |                        | 5,829   |   |                            | 1.2   | % |                          |   | 160                          |  | 0.2   | %
|Loans to state and municipal governments    |  |                        | 1,550   |   |                            | 0.3   | % |                          |   |                             |  | 0.0   | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|Total commercial and consumer loans         |  |                        | 22,724  |   |                            | 4.7   | % |                          |   | 206                          |  | 0.2   | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|Unearned income                             |  |                        | (42     | ) |                            | 0.0   | % |                          |   |                             |  | 0.0   | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  
|Total                                       |  | $                      | 482,784 |   |                            | 100.0 | % |                          | $ | 94,025                       |  | 100.0 | %
|                                            |  |                        |         |   |                            |       |   |                          |   |                              |  |       |  

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

When management believes there is sufficient doubt to the collectability of principal or interest on any loan, or generally when loans are 90 days or more
past due, the accrual of interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection. Interest payments received on nonaccrual loans are either applied against principal or
reported as income according to managements judgment as to the collectability of principal. Loans are returned to an accrual status when those factors that indicated doubtful collectability on a timely basis no longer exist. Foreclosed
properties are recorded at their fair value at the date of acquisition with additional provisions for estimated losses when a subsequent decline in value occurs.

Nonperforming assets at September 30, 2009 amounted to approximately $130.0 million, or 25.0% of total loans and other real estate. This compares to approximately $116.3 million or 21% at
December 31, 2008. The increase in nonperforming assets is 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 2009. With the significant
slowing of home and land



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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.



|                                                                                                         |  |                        |         |                  |   |                   |  |   |       
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ----------------- |  | - | ------
|                                                                                                         |  | September 30,2009      |         | December 31,2008 |   | September 30,2008
|                                                                                                         |  | (amounts in thousands)
|Nonaccrual loans                                                                                         |  | $                      | 91,921  |                  | $ | 77,804            |  | $ | 57,236
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 2,104   |                  |   | 20,066            |  |   | 6,417 
|Restructured loans                                                                                       |  |                        |        |                  |   |                  |  |   |      
|                                                                                                         |  |                        |         |                  |   |                   |  |   |       
|Total nonperforming loans                                                                                |  | $                      | 94,025  |                  | $ | 97,870            |  | $ | 63,653
|Foreclosed properties                                                                                    |  |                        | 35,903  |                  |   | 18,398            |  |   | 14,810
|                                                                                                         |  |                        |         |                  |   |                   |  |   |       
|Total nonperforming assets                                                                               |  | $                      | 129,928 |                  | $ | 116,268           |  | $ | 78,463
|                                                                                                         |  |                        |         |                  |   |                   |  |   |       

Foreclosed properties increased by $17.5 million, or 95% during the nine month period ended
September 30, 2009. The following chart shows the amount and percentage by category of our foreclosed properties.



|                        |  |                    |        |            |        |  
|----------------------- |  | ------------------ | ------ | ---------- | ------ | -
|                        |  | September 30, 2009 |       
|                        |  | Balance            |        | Percentage |       
|                        |  | (in thousands)     |       
|Residential Development |  | $                  | 21,278 |            | 59.26  | %
|Houses                  |  |                    | 8,016  |            | 22.33  | %
|Residential Lots        |  |                    | 2,006  |            | 5.59   | %
|Commercial Real Estate  |  |                    | 4,603  |            | 12.82  | %
|                        |  |                    |        |            |        |  
|                        |  | $                  | 35,903 |            | 100.00 | %
|                        |  |                    |        |            |        |  



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During the first nine months of 2009 we foreclosed on $25.4 million of real estate and sold $5.8 million of
real estate at a loss of $642,000. In addition, we wrote down the value of some of our properties by $1.6 million. The following shows a migration of the balance in foreclosed properties for the nine months ended September 30, 2009 in
thousands.



|                                           |  |   |        |  
|------------------------------------------ |  | - | ------ | -
|Balance at beginning of period             |  | $ | 18,398 |  
|Loans transferred to foreclosed properties |  |   | 25,370 |  
|Capitalized costs to properties            |  |   | 100    |  
|Cash sales proceeds                        |  |   | (5,517 | )
|Financed sales                             |  |   | (248   | )
|(Loss) on sale of properties               |  |   | (642   | )
|Write down of properties to fair value     |  |   | (1,558 | )
|                                           |  |   |        |  
|Balance at end of period                   |  | $ | 35,903 |  
|                                           |  |   |        |  

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have
not been included in the nonperforming asset table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. These classified
loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.



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Information regarding certain loans and allowance for loan loss data through September 30, 2009 and
2008 is as follows:



|                                                                              |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Nine Months EndedSeptember 30, |        
|                                                                              |  | 2009                           |         |   | 2008 |  
|                                                                              |  | (amounts in thousands)         |        
|Average amount of loans outstanding                                           |  | $                              | 517,230 |   |      | $ | 560,458 |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Allowance at beginning of the period                                          |  | $                              | 17,730  |   |      | $ | 7,657   |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Loans charged off:                                                            |  |                                |         |   |      |   |         |  
|Real estate                                                                   |  |                                | (17,535 | ) |      |   | (555    | )
|Commercial                                                                    |  |                                | (19     | ) |      |   | (10     | )
|Consumer installment                                                          |  |                                | (28     | ) |      |   | (29     | )
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                                | (17,582 | ) |      |   | (594    | )
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Recoveries                                                                    |  |                                |         |   |      |   |         |  
|Real estate                                                                   |  |                                |        |   |      |   | 1       |  
|Commercial                                                                    |  |                                | 93      |   |      |   |        |  
|Consumer installment                                                          |  |                                | 11      |   |      |   | 2       |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                                | 104     |   |      |   | 3       |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Net (charge-offs)/recoveries                                                  |  |                                | (17,478 | ) |      |   | (591    | )
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Additions to allowance charged to operating expense during period             |  |                                | 14,319  |   |      |   | 8,286   |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Balance at end of the period                                                  |  | $                              | 14,571  |   |      | $ | 15,352  |  
|                                                                              |  |                                |         |   |      |   |         |  
|                                                                              |  |                               
|Ratio of net loans charged off during the period to average loans outstanding |  |                                | 3.38    | % |      |   | 0.11    | %
|                                                                              |  |                                |         |   |      |   |         |  

The allowance for loan losses is a reserve established through charges to earnings in the form of a
provision for loan losses. The provision for loan losses is based on managements evaluation and assessment of the allowance for loan losses. Our assessment includes procedures to estimate probable losses and determine the adequacy and
appropriateness of the resulting allowance balance. The allowance for loan losses consists of two components: (1) a specific amount representative of identified credit exposures for each impaired loan based on an evaluation of the borrower and
the underlying collateral; and (2) a general amount based upon historical losses that have been adjusted to estimate current probable losses based on the use of eight specific risk factors representative of various economic conditions and
characteristics of the loan portfolio, as well as additional general qualitative factors.



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We establish the specific amount by examining all impaired loans. Under generally accepted accounting
principles, we may measure the loss either by (1) the observable market price of the loan; or (2) the present value of expected future cash flows discounted at the loans effective interest rate; or (3) the fair value of the
collateral if the loan is collateral dependent. Because the significant majority of our impaired loans are collateral dependent, nearly all of our specific allowances are calculated on the fair value of the collateral. As of September 30, 2009,
our impaired loans totaled $87.2 million of which $47.9 million have specific loss allocations of $6.6 million recorded. As of December 31, 2008, our impaired loans totaled $94.4 million of which $46.8 million had specific loss allocations of
$12.5 million. Changes in nonperforming loans plus our historical losses contributed to the increases in the loan loss provision for the nine month period ended September 30, 2009. The following chart shows our impaired loans as of
September 30, 2009 compared to December 31, 2008 and September 30, 2008.



|                                                               |  |                        |         |                  |   |                   |  |   |       
|-------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ----------------- |  | - | ------
|                                                               |  | September 30,2009      |         | December 31,2008 |   | September 30,2008
|                                                               |  | (amounts in thousands)
|Impaired loans without a valuation reserve                     |  | $                      | 90,175  |                  | $ | 47,637            |  | $ | 10,400
|Impaired loans with a valuation reserve                        |  |                        | 47,922  |                  |   | 46,767            |  |   | 61,800
|                                                               |  |                        |         |                  |   |                   |  |   |       
|Total impaired loans                                           |  |                        | 138,097 |                  |   | 94,404            |  |   | 72,200
|                                                               |  |                        |        
|Valuation allowance related to impaired loans                  |  |                        | 6,602   |                  |   | 12,496            |  |   | 11,800
|Average investment in impaired loans                           |  |                        | 108,508 |                  |   | 68,561            |  |   | 60,399
|Interest income recognized on impaired loans                   |  |                        | 339     |                  |   | 875               |  |   | 4     
|Nonaccrual loans                                               |  |                        | 91,921  |                  |   | 77,804            |  |   | 57,236
|Loans past due ninety days or more and still accruing interest |  |                        | 2,104   |                  |   | 20,066            |  |   | 6,417 

The general amount of the allowance is based upon historical losses that are adjusted to estimate
current probable losses using eight specific risk factors. The risk factors consist of: (1) economic factors including such matters as changes in the general economic conditions; (2) changes in local economic conditions;
(3) concentrations of credit; (4) deterioration in asset values; (5) slowing pace of housing sales; (6) deterioration in lot values; (7) higher loan to values given risk; and (8) level of loans secured by real estate.
These factors are evaluated and assigned percentages to be allocated to the portfolio on a quarterly basis. During the second quarter of 2009 the company changed the historical component of the reserve calculation to use only the most recent 6
quarters loss experience in calculating probable future losses. The historical loss component had previously been based on the most recent 5 year loss history. The weighting of these risk factors varies from period to period and will impact the
allowance for loan losses as changes in the risk factors increase or decrease from quarter to quarter. During the quarter ended September 30, 2009, changes in risk factors did not result in a significant change in the general amount of the
allowance.

The Company has originated construction and land development loans where a component of the cost of the project was the interest
required to service the debt during the construction period of the loan, sometimes known as interest reserves. The Company allows disbursements of this



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interest component as long as the project is progressing as originally projected and if there has been no deterioration of the financial standing of the borrower or the underlying project. If the
Company makes a determination that there is such deterioration, or if the loan becomes non- performing, the Company halts any disbursement of those funds identified for use in paying interest. In some cases, additional interest reserves may be taken
by use of deposited funds.

Noninterest income

Other income was $832,000 and $2,146,000 for the third quarter and first nine months of 2009, respectively, as compared to $674,000 and $2,113,000 for the same periods in 2008. In the third quarter,
service charges on deposit accounts increased by $112,000 over the third quarter 2008, primarily attributable to an increase in insufficient funds charges resulting from the introduction of a courtesy overdraft privilege program during the second
quarter of 2009. Mortgage banking income also increased during the third quarter of 2009 as a result of an increase in origination volume. Originations increased from $1.8 million in the third quarter of 2008 to $3.5 million for the same quarter in
2009.

Noninterest expense

For the third quarter, other expenses declined $182,000 compared to the third quarter of 2008. The slight decline resulted from a reduction in salaries and benefits of $138,000 and a reduction in net foreclosed properties expense in the
amount of $339,000 over the same period in 2008. These savings were mostly offset by an increase of $318,000 in FDIC Insurance premiums and other regulatory assessments for the third quarter compared to the third quarter of 2008 and an approximate
loss of $100,000 in debit card fraud losses as the result of merchant compromised card account numbers.

For the nine months ended
September 30, 2009, other expenses increased by $1.7 million or 16% compared to the same period in 2008. Expense control initiatives were responsible for declines in salaries and employee benefits of $602,000 and in occupancy and equipment
expenses of $154,000 for the first nine months of 2009 compared to the same period in 2008. Approximately $325,000 of the decrease in salaries and benefits resulted from the elimination of incentive and profit sharing expense in 2009. The remainder
of the reduction is attributable to reduction in staffing levels through attrition with the remainder of the savings resulting from maintaining salaries and benefits at 2008 levels. These savings in controllable operational expenses for the first
nine months of 2009 compared to the same period in 2008 were more than offset by the increase in net foreclosed properties expense, which increased by $914,000, plus we also incurred increased legal expenses of approximately $170,000 during the
period, primarily related to non performing asset collection efforts. FDIC Insurance premiums and other regulatory assessments also increased by $779,000 during the first nine months of 2009 compared to the same period in 2008. In addition to the
debit card fraud losses, during the first nine months of 2009 we also recognized a loss of $275,000 on stock we owned in a failed financial institution which provided correspondent banking services to community banks.



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Income taxes

The Company has recorded no income tax benefits related to 2009 pre-tax losses since the Company currently has net operating loss carryforwards which are not assured of realization.

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.



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

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

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

We use a third party simulation model to
monitor changes in net interest income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The
analysis of impact on net interest margins as well as economic value of equity over a twelve-month period is subjected up to a 300 basis point increase and decrease in rates. The third quarter model reflects an increase of 11% in net interest income
and a 9% increase in economic value of equity for a 100 basis point increase in rates. The same model shows a 4% decrease in net interest income and an 11% decrease in economic value of equity for a 100 basis point decrease in rates. Our
asset/liability committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate interest rate policy for management to follow in order to minimize the impact on
earnings and economic value of equity in the projected rate environment.



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|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.

Subsequent to the date of this evaluation, we determined that the validation testing, including
frequency thereof, performed on the financial models used in the preparation and analysis of our allowance for loan losses was ineffective, and this material weakness resulted in an error in the calculation of the general portion of our allowance
not being detected in a timely manner.



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PART 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 13, 2009 |  | BY:                           |  | /s/ David H. Gill                           
|                        |  |                               |  | David H. Gill, President and CEO            
|                        |  |                               |  | (Principal Executive Officer)               
|                        |  |                              
|DATE: November 13, 2009 |  | BY:                           |  | /s/ Charles W. Blair, Jr.                   
|                        |  |                               |  | Charles W. Blair, Jr., EVP & CFO            
|                        |  |                               |  | (Principal Financial and Accounting Officer)



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