##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended March 31, 2010

OR



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

For the Transition Period from
 to

Commission file number 0-49789

Henry County Bancshares, Inc.

(Exact name of registrant as specified in its charter)



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

(770) 474-7293

(Telephone Number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).    YES   ̈    NO   ̈

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



|                             |  |                        |  |                            |  |                            
|---------------------------- |  | ---------------------- |  | -------------------------- |  | ---------------------------
|Large accelerated filer     ̈ |  | Accelerated
filer     ̈ |  | Non-accelerated filer     ̈ |  | Smaller Reporting
Company þ

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

Common stock, par value $2.50 per share: 14,245,690 shares

outstanding as of April 30, 2010



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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  March 31, 2010 and December 31,
2009                                  |  | 3    
|         |  |                                                                                                    
|         |  | Consolidated Statements of Operations  Three Months Ended March 31, 2010 and 2009                  |  | 4    
|         |  |                                                                                                    
|         |  | Consolidated Statements of Comprehensive Income (Loss)  Three Months Ended March 31,
2010 and 2009 |  | 5    
|         |  |                                                                                                    
|         |  | Consolidated Statements of Stockholders Equity  Three Months Ended March 31,
 2010 and 2009       |  | 6    
|         |  |                                                                                                    
|         |  | Consolidated Statements of Cash Flows  Three Months Ended March 31, 2010 and 2009                  |  | 7-8  
|         |  |                                                                                                    
|         |  | Notes to Consolidated Financial Statements                                                          |  | 9-29 
|         |  |                                                                                                    
|         |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 30-47
|         |  |                                                                                                    
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market
Risk                                  |  | 47   
|         |  |                                                                                                    
|         |  | Item 4. Controls and Procedures                                                                     |  | 48   
|         |  |                                                                                                    
|PART II. |  | OTHER INFORMATION                                                                                   |  |      
|         |  |                                                                                                    
|         |  | Item 5. Other Information                                                                           |  | 49   
|         |  |                                                                                                    
|         |  | Item 6. Exhibits and Reports on Form 8-K                                                            |  | 50   
|         |  |                                                                                                    
|         |  | Signatures                                                                                          |  | 51   



2



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Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)



|                                                                                       |  |               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands, except share and per share amounts)                                     |  | March 31,2010 |         |   | December 31,2009 |  
|                                                                                       |  |              
|Assets                                                                                 |  |               |         |   |                  |   |         |  
|                                                                                       |  |              
|Cash and due from banks                                                                |  | $             | 11,819  |   |                  | $ | 11,887  |  
|Interest-bearing excess Federal Reserve balances                                       |  |               | 30,400  |   |                  |   | 25,700  |  
|Interest-bearing deposits in banks                                                     |  |               | 3,950   |   |                  |   | 635     |  
|Securities available for sale, at fair value                                           |  |               | 52,870  |   |                  |   | 72,177  |  
|Securities held to maturity (fair value approximates $706 and $705)                    |  |               | 695     |   |                  |   | 695     |  
|Restricted equity securities, at cost                                                  |  |               | 1,266   |   |                  |   | 1,266   |  
|Loans held for sale                                                                    |  |               | -       |   |                  |   | 499     |  
|                                                                                       |  |              
|Loans                                                                                  |  |               | 418,384 |   |                  |   | 434,891 |  
|Less allowance for loan losses                                                         |  |               | 13,735  |   |                  |   | 13,324  |  
|                                                                                       |  |               |         |   |                  |   |         |  
|Loans, net                                                                             |  |               | 404,649 |   |                  |   | 421,567 |  
|                                                                                       |  |              
|Premises and equipment                                                                 |  |               | 9,360   |   |                  |   | 9,481   |  
|Foreclosed properties                                                                  |  |               | 64,469  |   |                  |   | 49,732  |  
|Income taxes receivable                                                                |  |               | 17,457  |   |                  |   | 17,457  |  
|Other assets                                                                           |  |               | 3,334   |   |                  |   | 3,552   |  
|                                                                                       |  |               |         |   |                  |   |         |  
|Total assets                                                                           |  | $             | 600,269 |   |                  | $ | 614,648 |  
|                                                                                       |  |               |         |   |                  |   |         |  
|                                                                                       |  |              
|Liabilities and Stockholders Equity                                                   |  |               |         |   |                  |   |         |  
|                                                                                       |  |              
|Deposits                                                                               |  |               |         |   |                  |   |         |  
|Noninterest-bearing                                                                    |  | $             | 71,645  |   |                  | $ | 59,831  |  
|Interest-bearing                                                                       |  |               | 497,812 |   |                  |   | 526,270 |  
|                                                                                       |  |               |         |   |                  |   |         |  
|Total deposits                                                                         |  |               | 569,457 |   |                  |   | 586,101 |  
|                                                                                       |  |              
|Other borrowings                                                                       |  |               | 1,277   |   |                  |   | 1,436   |  
|Other liabilities                                                                      |  |               | 2,916   |   |                  |   | 3,784   |  
|                                                                                       |  |               |         |   |                  |   |         |  
|Total liabilities                                                                      |  |               | 573,650 |   |                  |   | 591,321 |  
|                                                                                       |  |               |         |   |                  |   |         |  
|                                                                                       |  |              
|Commitments and contingencies (Note 7)                                                 |  |               |         |   |                  |   |         |  
|                                                                                       |  |              
|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     |  
|Accumulated deficit                                                                    |  |               | (8,322  | ) |                  |   | (12,491 | )
|Accumulated other comprehensive income                                                 |  |               | 548     |   |                  |   | 1,425   |  
|Less cost of treasury stock, 143,060 shares                                            |  |               | (2,319  | ) |                  |   | (2,319  | )
|                                                                                       |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                             |  |               | 26,619  |   |                  |   | 23,327  |  
|                                                                                       |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                             |  | $             | 600,269 |   |                  | $ | 614,648 |  
|                                                                                       |  |               |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three months ended March 31, 2010 and 2009

(unaudited)



|                                                    |  |      |            |   |      |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|(in thousands, except share and per share amounts)  |  | 2010 |            |   | 2009 |  
|                                                    |  |     
|Interest income                                     |  |      |            |   |      |   |            |  
|Loans                                               |  | $    | 5,122      |   |      | $ | 5,921      |  
|Taxable securities                                  |  |      | 490        |   |      |   | 615        |  
|Nontaxable securities                               |  |      | 48         |   |      |   | 49         |  
|Deposits in banks                                   |  |      | 4          |   |      |   | 2          |  
|Federal Reserve balances                            |  |      | 18         |   |      |   | -          |  
|Federal funds sold                                  |  |      | -          |   |      |   | 10         |  
|                                                    |  |      |            |   |      |   |            |  
|Total interest income                               |  |      | 5,682      |   |      |   | 6,597      |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Interest expense                                    |  |      |            |   |      |   |            |  
|Deposits                                            |  |      | 2,849      |   |      |   | 3,836      |  
|Other borrowings                                    |  |      | 11         |   |      |   | 14         |  
|                                                    |  |      |            |   |      |   |            |  
|Total interest expense                              |  |      | 2,860      |   |      |   | 3,850      |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Net interest income                                 |  |      | 2,822      |   |      |   | 2,747      |  
|Provision for loan losses                           |  |      | 469        |   |      |   | 1,600      |  
|                                                    |  |      |            |   |      |   |            |  
|Net interest income after provision for loan losses |  |      | 2,353      |   |      |   | 1,147      |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Other operating income                              |  |      |            |   |      |   |            |  
|Service charges on deposit accounts                 |  |      | 443        |   |      |   | 308        |  
|Other service charges and fees                      |  |      | 200        |   |      |   | 201        |  
|Securities gains (losses), net                      |  |      | 813        |   |      |   | (275       | )
|Mortgage banking income                             |  |      | 13         |   |      |   | 95         |  
|                                                    |  |      |            |   |      |   |            |  
|Total other operating income                        |  |      | 1,469      |   |      |   | 329        |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Other expenses (income)                             |  |      |            |   |      |   |            |  
|Salaries and employee benefits                      |  |      | 1,339      |   |      |   | 1,738      |  
|Occupancy and equipment expenses                    |  |      | 377        |   |      |   | 459        |  
|Foreclosed properties, net                          |  |      | (2,917     | ) |      |   | 743        |  
|FDIC and regulatory                                 |  |      | 387        |   |      |   | 146        |  
|Other operating expenses                            |  |      | 467        |   |      |   | 767        |  
|                                                    |  |      |            |   |      |   |            |  
|Total other expenses (income)                       |  |      | (347       | ) |      |   | 3,853      |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Earnings (loss) before income taxes                 |  |      | 4,169      |   |      |   | (2,377     | )
|                                                    |  |     
|Income tax expense (benefit)                        |  |      | -          |   |      |   | -          |  
|                                                    |  |      |            |   |      |   |            |  
|                                                    |  |     
|Net earnings (loss)                                 |  | $    | 4,169      |   |      | $ | (2,377     | )
|                                                    |  |      |            |   |      |   |            |  
|Earnings (loss) per share                           |  | $    | 0.29       |   |      | $ | (0.17      | )
|                                                    |  |      |            |   |      |   |            |  
|Weighted average shares outstanding                 |  |      | 14,245,690 |   |      |   | 14,245,690 |  
|                                                    |  |      |            |   |      |   |            |  

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

Three months ended March 31, 2010 and 2009

(unaudited)



|                                                                                                    |  |      |       |   |      |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|(in thousands)                                                                                      |  | 2010 |       |   | 2009 |  
|                                                                                                    |  |     
|Net earnings (loss)                                                                                 |  | $    | 4,169 |   |      | $ | (2,377 | )
|                                                                                                    |  |      |       |   |      |   |        |  
|                                                                                                    |  |     
|Other comprehensive income (loss), net of tax                                                       |  |      |       |   |      |   |        |  
|                                                                                                    |  |     
|Unrealized holding gains (losses) on investment securities available for sale arising during
period |  |      | (64   | ) |      |   | 173    |  
|                                                                                                    |  |     
|Reclassification adjustment for gains on sale of securities available for sale realized in
earnings |  |      | (813  | ) |      |   | -      |  
|                                                                                                    |  |     
|Associated income taxes                                                                             |  |      | -     |   |      |   | (59    | )
|                                                                                                    |  |      |       |   |      |   |        |  
|                                                                                                    |  |     
|Total other comprehensive (loss) income, net of tax                                                 |  |      | (877  | ) |      |   | 114    |  
|                                                                                                    |  |      |       |   |      |   |        |  
|                                                                                                    |  |     
|Total comprehensive income (loss)                                                                   |  | $    | 3,292 |   |      | $ | (2,263 | )
|                                                                                                    |  |      |       |   |      |   |        |  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

Three months ended March 31, 2010 and 2009

(unaudited)



|                                                   |  |             |        |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ----------- | ------ | ------- | - | ------------------------- |  | - | ----------------------------------- | - |  | ------------- | ----- | - | ------------------------ | - | ------ | - |  | - | ------ | -
|(in thousands, except share and per share amounts) |  | CommonStock |        | Surplus |   | RetainedEarnings(Deficit) |  |   | AccumulatedOtherComprehensiveIncome |   |  | TreasuryStock |       |   | TotalStockholdersEquity |  
|                                                   |  |             |        |         |   |                          
|Balance, December 31, 2008                         |  | $           | 35,972 |         | $ | 740                       |  | $ | 24,161                              |   |  | $             | 789   |   |                          | $ | (2,319 | ) |  | $ | 59,343 |  
|Net loss                                           |  |             | -      |         |   | -                         |  |   | (2,377                              | ) |  |               | -     |   |                          |   | -      |   |  |   | (2,377 | )
|Other comprehensive income                         |  |             | -      |         |   | -                         |  |   | -                                   |   |  |               | 114   |   |                          |   | -      |   |  |   | 114    |  
|                                                   |  |             |        |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |        |  
|Balance, March 31, 2009                            |  | $           | 35,972 |         | $ | 740                       |  | $ | 21,784                              |   |  | $             | 903   |   |                          | $ | (2,319 | ) |  | $ | 57,080 |  
|                                                   |  |             |        |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |        |  
|                                                   |  |             |        |         |   |                          
|Balance, December 31, 2009                         |  | $           | 35,972 |         | $ | 740                       |  | $ | (12,491                             | ) |  | $             | 1,425 |   |                          | $ | (2,319 | ) |  | $ | 23,327 |  
|Net earnings                                       |  |             | -      |         |   | -                         |  |   | 4,169                               |   |  |               | -     |   |                          |   | -      |   |  |   | 4,169  |  
|Other comprehensive loss                           |  |             | -      |         |   | -                         |  |   | -                                   |   |  |               | (877  | ) |                          |   | -      |   |  |   | (877   | )
|                                                   |  |             |        |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |        |  
|Balance, March 31, 2010                            |  | $           | 35,972 |         | $ | 740                       |  | $ | (8,322                              | ) |  | $             | 548   |   |                          | $ | (2,319 | ) |  | $ | 26,619 |  
|                                                   |  |             |        |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Three months ended March 31, 2010 and 2009

(unaudited)



|                                                                                           |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|(in thousands)                                                                             |  | 2010 |         |   | 2009 |  
|                                                                                           |  |     
|Operating Activities                                                                       |  |      |         |   |      |   |         |  
|Net earnings (loss)                                                                        |  | $    | 4,169   |   |      | $ | (2,377  | )
|Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation                                                                               |  |      | 121     |   |      |   | 160     |  
|Decrease (increase) in loans held for sale                                                 |  |      | 499     |   |      |   | (760    | )
|Provision for loan losses                                                                  |  |      | 469     |   |      |   | 1,600   |  
|Impairment losses (gains) on foreclosed properties                                         |  |      | (3,192  | ) |      |   | 157     |  
|Gains on sale of securities available for sale                                             |  |      | (813    | ) |      |   | -       |  
|Impairment losses on restricted equity securities                                          |  |      | -       |   |      |   | 275     |  
|Net losses on sale of foreclosed properties                                                |  |      | 111     |   |      |   | 420     |  
|Decrease in interest receivable                                                            |  |      | 214     |   |      |   | 191     |  
|Decrease in interest payable                                                               |  |      | (623    | ) |      |   | (343    | )
|Decrease in income taxes receivable                                                        |  |      | -       |   |      |   | 1,790   |  
|Net other operating activities                                                             |  |      | (241    | ) |      |   | (689    | )
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                  |  |      | 714     |   |      |   | 424     |  
|                                                                                           |  |      |         |   |      |   |         |  
|                                                                                           |  |     
|Investing Activities                                                                       |  |      |         |   |      |   |         |  
|Purchases of securities available for sale                                                 |  |      | (15,708 | ) |      |   | (23,026 | )
|Proceeds from maturities of securities available for sale                                  |  |      | 14,624  |   |      |   | 13,246  |  
|Proceeds from sale of securities available for sale                                        |  |      | 20,327  |   |      |   | -       |  
|Proceeds from maturities of securities held to maturity                                    |  |      | -       |   |      |   | 2,316   |  
|Retirement of restricted equity securities                                                 |  |      | -       |   |      |   | 100     |  
|Net increase in interest-bearing excess Federal Reserve balances                           |  |      | (4,700  | ) |      |   | -       |  
|Net increase in federal funds sold                                                         |  |      | -       |   |      |   | (6,900  | )
|Net increase in interest-bearing deposits in banks                                         |  |      | (3,315  | ) |      |   | (2,077  | )
|Net decrease in loans                                                                      |  |      | 3,402   |   |      |   | 187     |  
|Additions to foreclosed properties                                                         |  |      | (27     | ) |      |   | (55     | )
|Proceeds from sale of foreclosed properties                                                |  |      | 1,418   |   |      |   | 2,216   |  
|Purchase of premises and equipment                                                         |  |      | -       |   |      |   | (175    | )
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                        |  |      | 16,021  |   |      |   | (14,168 | )
|                                                                                           |  |      |         |   |      |   |         |  
|                                                                                           |  |     
|Financing Activities                                                                       |  |      |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                        |  |      | (16,644 | ) |      |   | 15,255  |  
|Net repayments of other borrowings                                                         |  |      | (159    | ) |      |   | (905    | )
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                        |  |      | (16,803 | ) |      |   | 14,350  |  
|                                                                                           |  |      |         |   |      |   |         |  
|                                                                                           |  |     
|Net increase (decrease) in cash and due from banks                                         |  |      | (68     | ) |      |   | 606     |  
|                                                                                           |  |     
|Cash and due from banks, beginning of period                                               |  |      | 11,887  |   |      |   | 14,039  |  
|                                                                                           |  |      |         |   |      |   |         |  
|                                                                                           |  |     
|Cash and due from banks, end of period                                                     |  | $    | 11,819  |   |      | $ | 14,645  |  
|                                                                                           |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Three months ended March 31, 2010 and 2009

(unaudited)



|                                                  |  |      |        |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|(in thousands)                                    |  | 2010 |        | 2009 |  
|                                                  |  |     
|Supplemental Disclosures of Cash Flow Information |  |      |        |      |   |        |  
|                                                  |  |     
|Cash paid (received) for:                         |  |      |        |      |   |        |  
|Interest                                          |  | $    | 3,483  |      | $ | 4,193  |  
|                                                  |  |     
|Income taxes                                      |  | $    | -      |      | $ | (1,790 | )
|                                                  |  |     
|Noncash transactions                              |  |      |        |      |   |        |  
|Other real estate acquired in settlement of loans |  | $    | 13,047 |      | $ | 1,578  |  

See accompanying
notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



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

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

The results of operations for the three month period ended March 31, 2010 are not necessarily indicative of the
results to be expected for the full year.



|2) | RECENT OPERATING LOSSES AND IMPACT ON CAPITAL
|-- | ---------------------------------------------

The Company has been adversely impacted by the continuing deterioration of the Metropolitan Atlanta real estate market
causing continuing losses at the Bank, resulting in the Bank being deemed significantly undercapitalized at December 31, 2009. On May 7, 2010, the Bank entered into a Stipulation and Consent Agreement with the Federal Deposit Insurance
Corporation (the FDIC) and the Georgia Department of Banking and Finance (the Department) (collectively, the Supervisory Authorities) agreeing to the issuance of a Consent Order (the Order). The Order
stipulates, among other conditions, that the Bank will reach and maintain a Tier 1 capital ratio equal to or exceeding 8%. There is no assurance that the Banks capital can be increased to the level required by the Supervisory Authorities.
Also, should the Banks capital not be increased to the level set forth in the Order, it is uncertain what action the Supervisory Authorities will take. These conditions raise substantial doubt about the Companys ability to continue as a
going concern.

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

Actions have been initiated to mitigate lending exposure, strengthen the loan portfolio, and protect the Banks
collateral interests, as well as to reduce operating costs and provide for positive cash flows throughout 2010. As a result of these and other actions, the Bank generated sufficient earnings during the first quarter of 2010 to improve its Tier 1
Capital level to in excess of 4% which is considered by the Supervisory Authorities as undercapitalized, rather than significantly undercapitalized. Although there are no



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|2) | RECENT OPERATING LOSSES AND IMPACT ON CAPITAL, continued
|-- | --------------------------------------------------------



assurances, management believes that based on current projections, the Bank will be able to maintain this level of capital for the remainder of 2010.

In addition, the Capital Committee of the Board of Directors continues to review various alternatives for increasing the
Banks capital and has asked management to prepare the necessary documentation to use in an offering of common stock at such time, most likely in the second or third quarter of 2010, that it is deemed appropriate to offer common stock for sale
to its current stockholders and other qualified investors. However, there can be no assurance that any offering of common stock will be successful in raising sufficient capital to return the Bank to the required capital levels.



|3) | ACCOUNTING STANDARDS UPDATES
|-- | ----------------------------

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements (ASC No. 2010-09). ASU No. 2010-09 removes some contradictions between the requirements of GAAP and the filing rules of the Securities and Exchange Commission
(SEC). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance
was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on the Companys results of operations, financial position or disclosures.

In February 2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation: Amendments for
Certain Investment Funds (ASU No. 2010-10). ASU No. 2010-10 indefinitely defers the effective date for certain investment funds, the amendments made to FASB ASC 810-10 related to variable interest entities by Statement of
Financial Accounting Standards (SFAS) No. 167, however this deferral does not apply to the disclosure requirements of SFAS No. 167. ASU No. 2010-10 also clarifies that (1) interests of related parties must be
considered in determining whether fees paid to decision makers or service providers constitute a variable interest, and (2) a quantitative calculation should not be the only basis on which such determination is made. This guidance is effective
as of the beginning of the first annual period beginning after November 15, 2009, and for interim periods within that first annual reporting period. It is not expected to have a material impact on the Companys results of operations,
financial position or disclosures.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|3) | ACCOUNTING STANDARDS UPDATES, continued
|-- | ---------------------------------------



In March 2010, the FASB issued Accounting Standards Update
No. 2010-11, Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives (ASU No. 2010-11). ASU No. 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded
derivative bifurcation requirements, by resolving a potential ambiguity about the breadth of the embedded credit derivative scope exception with regard to some types of contracts, such as collateralized debt obligations (CDOs) and
synthetic CDOs. The scope exception will no longer apply to some contracts that contain an embedded credit derivative feature that transfers credit risk. The ASU is effective for fiscal quarters beginning after June 15, 2010, and is not
expected to have a material impact on the Companys results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-12, Accounting for Certain Tax Effects
of the 2010 Health Care Reform Acts (ASU No. 2010-12). ASU No. 2010-12 formally incorporates the SECs position concerning accounting for specific provisions of the two health care reform acts that were enacted on
different dates as one. This guidance allows companies with reporting period-end dates between March 23, 2010 and March 30, 2010 to avoid accounting for the enactment of the two health care laws that affect the measurement of the same
deferred tax asset in two separate periods. This guidance was effective upon issuance and is not expected to have a material impact on the Companys results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-13, Effect of Denominating the Exercise
Price of a Share-based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (ASU No. 2010-13). ASU No. 2010-13 clarifies that an employee share-based payment award with an exercise
price denominated in the currency of a market in which a substantial portion of an entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2010. It is not expected to have
a material impact on the Companys results of operations, financial position or disclosures.

In
April 2010, the FASB issued Accounting Standards Update No. 2010-15, How Investments Held through Separate Accounts Affect an Insurers Consolidation Analysis of Those Investments (ASU No. 2010-15). ASU
No. 2010-15 provides guidance concerning consolidation by an insurance entity of (1) separate account interests held for the benefit of policy holders, and (2) an investment in which a separate account holds a controlling financial
interest. In addition, ASU No . 2010-15 amends FASB guidance so that an insurer is not required to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not consolidated in the
separate accounts standalone financial statements. The revised guidance, which should be applied retrospectively to all prior periods presented, is effective for fiscal years (and interim periods within such years)



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|3) | ACCOUNTING STANDARDS UPDATES, continued
|-- | ---------------------------------------



beginning after December 15, 2010, with earlier application permitted. This ASU has no impact on the Companys results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Milestone Method of Revenue
Recognition a consensus of the FASB Emerging Issues Task Force (ASU No. 2010-17). ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue
recognition for research and development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of
phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the
milestone method. The amendments in this ASU are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Because the Company is not involved in
research and development arrangements, ASU No. 2010-17 will have no impact on the Companys results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When
the Loan Is Part of a Pool That Is Accounted for as a Single Asset (ASU No. 2010-18). ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a
single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30. ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of
loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification. ASU No. 2010-18 clarifies that modifications of loans that
are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to
consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans
accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. ASU 2010-18 is not expected to have a material impact on the Companys results of operations, financial position
or disclosures.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



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

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



|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|---------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|Securities Available for Sale      |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|(in thousands)                     |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                   |  |               |        |                     
|March 31, 2010:                    |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|U.S. Government sponsored agencies |  | $             | 18,117 |                      | $ | 44                    |  | $ | (1                 | ) |  | $ | 18,160
|State and municipal securities     |  |               | 11,786 |                      |   | 156                   |  |   | (129               | ) |  |   | 11,813
|Mortgage-backed securities         |  |               | 22,419 |                      |   | 515                   |  |   | (37                | ) |  |   | 22,897
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $             | 52,322 |                      | $ | 715                   |  | $ | (167               | ) |  | $ | 52,870
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |               |        |                     
|December 31, 2009:                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|U.S. Government sponsored agencies |  | $             | 29,581 |                      | $ | 216                   |  | $ | (108               | ) |  | $ | 29,689
|State and municipal securities     |  |               | 10,461 |                      |   | 169                   |  |   | (85                | ) |  |   | 10,545
|Mortgage-backed securities         |  |               | 30,710 |                      |   | 1,284                 |  |   | (51                | ) |  |   | 31,943
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  | $             | 70,752 |                      | $ | 1,669                 |  | $ | (244               | ) |  | $ | 72,177
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Securities Held to Maturity        |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |               |        |                     
|(in thousands)                     |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                   |  |               |        |                     
|March 31, 2010                     |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|State and municipal securities     |  | $             | 695    |                      | $ | 11                    |  | $ | -                  |   |  | $ | 706   
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|                                   |  |               |        |                     
|December 31, 2009:                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|State and municipal securities     |  | $             | 695    |                      | $ | 11                    |  | $ | (1                 | ) |  | $ | 705   
|                                   |  |               |        |                      |   |                       |  |   |                    |   |  |   |       

Restricted equity securities are
summarized as follows:



|                             |  |               |       |                  |   |       |  |  |  | 
|---------------------------- |  | ------------- | ----- | ---------------- | - | ----- |  |  |  | 
|(in thousands)               |  | March 31,2010 |       | December 31,2009 |   |       |  | 
|                             |  |               |       |                 
|Federal Home Loan Bank stock |  | $             | 1,266 |                  | $ | 1,266 |  |  |  | 
|                             |  |               |       |                  |   |       |  |  |  | 



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



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



Securities with a carrying value of $18,588,000 at March 31, 2010
and $21,170,000 at December 31, 2009 were pledged to secure public deposits and for other purposes required or permitted by law.

The following table summarizes securities sales activity for the three month periods ended March 31, 2010 and 2009:



|                                                  |  |                             |        |      |   |      |  
|------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ---- | -
|                                                  |  | Three months endedMarch 31, |       
|(in thousands)                                    |  | 2010                        |        | 2009 |  
|                                                  |  |                            
|Proceeds from sales                               |  | $                           | 20,327 |      | $ | -    |  
|                                                  |  |                             |        |      |   |      |  
|                                                  |  |                            
|Gross gains on sale                               |  |                             | 813    |      |   | -    |  
|Impairment losses on restricted equity securities |  |                             | -      |      |   | (275 | )
|                                                  |  |                             |        |      |   |      |  
|Net gains (losses) on sales of securities         |  | $                           | 813    |      | $ | (275 | )
|                                                  |  |                             |        |      |   |      |  

The amortized cost and fair value of debt securities as of March 31, 2010 by
contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not
included in the maturity categories in the following summary.



|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|-------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------------- |  | ------------------- | --- |  | - | ---
|                                       |  | Securities Available forSale |        | Securities Held toMaturity
|(in thousands)                         |  | AmortizedCost                |        | EstimatedFair Value        |   | AmortizedCost |  | EstimatedFair Value
|                                       |  |                              |        |                           
|Due in one year or less                |  | $                            | 4,554  |                            | $ | 4,586         |  | $                   | 170 |  | $ | 172
|Due after one year through five years  |  |                              | 7,011  |                            |   | 7,115         |  |                     | 525 |  |   | 534
|Due after five years through ten years |  |                              | 13,926 |                            |   | 13,926        |  |                     | -   |  |   | -  
|After ten years                        |  |                              | 4,412  |                            |   | 4,346         |  |                     | -   |  |   | -  
|Mortgage-backed securities             |  |                              | 22,419 |                            |   | 22,897        |  |                     | -   |  |   | -  
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|                                       |  | $                            | 52,322 |                            | $ | 52,870        |  | $                   | 695 |  | $ | 706
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



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



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

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



|                                      |  |                     |        |                   |   |           |  |                  |   |  |   |  
|------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | - |  | - | -
|Securities Available for Sale         |  |                     |        |                   |   |           |  |                  |   |  |   |  
|                                      |  | Less Than 12 Months |        | 12 Months or More
|(in thousands)                        |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses
|                                      |  |                     |        |                  
|March 31, 2010                        |  |                     |        |                   |   |           |  |                  |   |  |   |  
|U. S. Government sponsored agencies   |  | $                   | 2,994  |                   | $ | 1         |  | $                | - |  | $ | -
|State and municipal securities        |  |                     | 4,339  |                   |   | 129       |  |                  | - |  |   | -
|Mortgage-backed securities            |  |                     | 6,137  |                   |   | 37        |  |                  | - |  |   | -
|                                      |  |                     |        |                   |   |           |  |                  |   |  |   |  
|Total temporarily impaired securities |  | $                   | 13,470 |                   | $ | 167       |  | $                | - |  | $ | -
|                                      |  |                     |        |                   |   |           |  |                  |   |  |   |  
|                                      |  |                     |        |                  
|December 31, 2009                     |  |                     |        |                   |   |           |  |                  |   |  |   |  
|U. S. Government sponsored agencies   |  | $                   | 5,888  |                   | $ | 108       |  | $                | - |  | $ | -
|State and municipal securities        |  |                     | 2,923  |                   |   | 85        |  |                  | - |  |   | -
|Mortgage-backed securities            |  |                     | 2,019  |                   |   | 51        |  |                  | - |  |   | -
|                                      |  |                     |        |                   |   |           |  |                  |   |  |   |  
|Total temporarily impaired securities |  | $                   | 10,830 |                   | $ | 244       |  | $                | - |  | $ | -
|                                      |  |                     |        |                   |   |           |  |                  |   |  |   |  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



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



|                                      |  |                     |   |                   |   |           |  |                  |     |  |   |  
|------------------------------------- |  | ------------------- | - | ----------------- | - | --------- |  | ---------------- | --- |  | - | -
|Securities Held to Maturity           |  | Less Than 12 Months |   | 12 Months or More
|(in thousands)                        |  | FairValue           |   | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses
|                                      |  |                     |   |                  
|March 31, 2010                        |  |                     |   |                   |   |           |  |                  |     |  |   |  
|U. S. Government sponsored agencies   |  | $                   | - |                   | $ | -         |  | $                | -   |  | $ | -
|State and municipal securities        |  |                     | - |                   |   | -         |  |                  | -   |  |   | -
|Mortgage-backed securities            |  |                     | - |                   |   | -         |  |                  | -   |  |   | -
|                                      |  |                     |   |                   |   |           |  |                  |     |  |   |  
|Total temporarily impaired securities |  | $                   | - |                   | $ | -         |  | $                | -   |  | $ | -
|                                      |  |                     |   |                   |   |           |  |                  |     |  |   |  
|                                      |  |                     |   |                  
|December 31, 2009                     |  |                     |   |                   |   |           |  |                  |     |  |   |  
|U. S. Government sponsored agencies   |  | $                   | - |                   | $ | -         |  | $                | -   |  | $ | -
|State and municipal securities        |  |                     | - |                   |   | -         |  |                  | 249 |  |   | 1
|Mortgage-backed securities            |  |                     | - |                   |   | -         |  |                  | -   |  |   | -
|                                      |  |                     |   |                   |   |           |  |                  |     |  |   |  
|Total temporarily impaired securities |  | $                   | - |                   | $ | -         |  | $                | 249 |  | $ | 1
|                                      |  |                     |   |                   |   |           |  |                  |     |  |   |  

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|5) | LOANS
|-- | -----



The composition of loans is summarized as follows:



|                          |  |               |         |   |                  |   |         |  
|------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands)            |  | March 31,2010 |         |   | December 31,2009 |  
|                          |  |              
|Real estate-commercial    |  |               |         |   |                  |   |         |  
|Owner occupied            |  | $             | 163,039 |   |                  | $ | 170,410 |  
|Non-owner occupied        |  |               | 17,155  |   |                  |   | 14,793  |  
|Real estate-construction  |  |               | 166,103 |   |                  |   | 175,527 |  
|Real estate-1-4 family    |  |               | 52,630  |   |                  |   | 54,332  |  
|Commercial                |  |               | 14,063  |   |                  |   | 14,396  |  
|Consumer                  |  |               | 5,423   |   |                  |   | 5,468   |  
|                          |  |               |         |   |                  |   |         |  
|                          |  |               | 418,413 |   |                  |   | 434,926 |  
|                          |  |              
|Deferred loan fees        |  |               | (29     | ) |                  |   | (35     | )
|Allowance for loan losses |  |               | (13,735 | ) |                  |   | (13,324 | )
|                          |  |               |         |   |                  |   |         |  
|Loans, net                |  | $             | 404,649 |   |                  | $ | 421,567 |  
|                          |  |               |         |   |                  |   |         |  

Included in real estate construction loans above, at March 31, 2010 are $97,639,000 of
interest only loans of which 86% have interest due on at least a semiannual basis and 14% have interest due at maturity.

Changes in the allowance for loan losses are as follows:



|                                           |  |                              |        |   |      |   |        |  
|------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | Three months ended March 31, |       
|(amounts in thousands)                     |  | 2010                         |        |   | 2009 |  
|                                           |  |                             
|Balance, beginning of period               |  | $                            | 13,324 |   |      | $ | 17,730 |  
|                                           |  |                             
|Provision for loan losses                  |  |                              | 469    |   |      |   | 1,600  |  
|                                           |  |                             
|Loans charged off                          |  |                              | (131   | ) |      |   | (1,341 | )
|                                           |  |                             
|Recoveries of loans previously charged off |  |                              | 73     |   |      |   | 8      |  
|                                           |  |                              |        |   |      |   |        |  
|                                           |  |                             
|Balance, end of period                     |  | $                            | 13,735 |   |      | $ | 17,997 |  
|                                           |  |                              |        |   |      |   |        |  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|5) | LOANS, continued
|-- | ----------------



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

Included in certain
loan categories in the impaired loans are troubled debt restructurings that were classified as nonperforming. At March 31, 2010, the Company had $965,000 in residential mortgages, $69,317,000 in construction loans, $20,787,000 in commercial
real estate loans and $769,000 in commercial loans that were modified in troubled debt restructuring and nonperforming. In addition to these amounts, the Company had troubled debt restructurings that were performing in accordance with their modified
terms of $4,121,000 in residential mortgages, $14,283,000 in construction loans, $8,985,000 in commercial real estate loans and $2,014,000 in commercial loans at March 31, 2010.

The following is a summary of information pertaining to impaired loans, nonaccrual loans, and loans past due ninety days
or more. This summary excludes performing troubled debt restructurings.



|                                                               |  |               |         |                  |   |        
|-------------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|(amounts in thousands)                                         |  | March 31,2010 |         | December 31,2009
|                                                               |  |              
|Impaired loans without a valuation reserve                     |  | $             | 91,452  |                  | $ | 94,382 
|Impaired loans with a valuation reserve                        |  |               | 17,802  |                  |   | 20,334 
|                                                               |  |               |         |                  |   |        
|Total impaired loans                                           |  | $             | 109,254 |                  | $ | 114,716
|                                                               |  |               |         |                  |   |        
|                                                               |  |              
|Valuation allowance related to impaired loans                  |  | $             | 5,258   |                  | $ | 5,284  
|Average investment in impaired loans                           |  |               | 111,985 |                  |   | 105,966
|Interest income recognized on impaired loans                   |  |               | 626     |                  |   | 206    
|Interest income recognized on a cash basis on impaired loans   |  |               | 565     |                  |   | 68     
|Nonaccrual loans                                               |  |               | 81,780  |                  |   | 101,558
|Loans past due ninety days or more and still accruing interest |  |               | 1,800   |                  |   | 471    

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|5) | LOANS, continued
|-- | ----------------



In the ordinary course of business, the Company has granted loans to
certain related parties, including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type
of loan. Changes in related party loans (in thousands) for the three months ended March 31, 2010 are as follows:



|                             |  |   |     |  
|---------------------------- |  | - | --- | -
|Balance, beginning of period |  | $ | 163 |  
|Advances                     |  |   | -   |  
|Repayments                   |  |   | (5  | )
|                             |  |   |     |  
|Balance, end of period       |  | $ | 158 |  
|                             |  |   |     |  



|6) | FORECLOSED PROPERTIES
|-- | ---------------------

A summary of activity in foreclosed properties is as follows:



|                               |  |                              |        |   |      |   |        |  
|------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                               |  | Three months ended March 31, |       
|(in thousands)                 |  | 2010                         |        |   | 2009 |  
|                               |  |                             
|Balance, beginning of period   |  | $                            | 49,732 |   |      | $ | 18,398 |  
|Foreclosures transferred in    |  |                              | 13,047 |   |      |   | 1,578  |  
|Fair value gains (losses), net |  |                              | 3,192  |   |      |   | (157   | )
|Capital costs added            |  |                              | 27     |   |      |   | 55     |  
|Proceeds from sales            |  |                              | (1,418 | ) |      |   | (2,216 | )
|Losses from sales              |  |                              | (111   | ) |      |   | (420   | )
|                               |  |                              |        |   |      |   |        |  
|Balance, end of period         |  | $                            | 64,469 |   |      | $ | 17,238 |  
|                               |  |                              |        |   |      |   |        |  

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|6) | FORECLOSED PROPERTIES, continued
|-- | --------------------------------



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



|                                               |  |                              |        |   |      |   |    
|---------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ---
|                                               |  | Three months ended March 31,
|(in thousands)                                 |  | 2010                         |        |   | 2009
|                                               |  |                             
|Net loss on sales of other real estate         |  | $                            | 111    |   |      | $ | 420
|Fair value adjustment to foreclosed properties |  |                              | (3,192 | ) |      |   | 157
|Operating expenses, net of rental income       |  |                              | 164    |   |      |   | 166
|                                               |  |                              |        |   |      |   |    
|                                               |  | $                            | (2,917 | ) |      | $ | 743
|                                               |  |                              |        |   |      |   |    



|7) | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

Loan Commitments

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

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



|                             |  |               |        |                  |   |       
|---------------------------- |  | ------------- | ------ | ---------------- | - | ------
|(in thousands)               |  | March 31,2010 |        | December 31,2009
|                             |  |              
|Standby letters of credit    |  | $             | 2,762  |                  | $ | 2,671 
|                             |  |              
|Commitments to extend credit |  |               | 30,756 |                  |   | 36,236
|                             |  |               |        |                  |   |       
|                             |  |              
|                             |  | $             | 33,518 |                  | $ | 38,907
|                             |  |               |        |                  |   |       



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|7) | COMMITMENTS AND CONTINGENCIES, continued
|-- | ----------------------------------------



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

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

Contingencies

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



|8) | CONCENTRATIONS OF CREDIT RISK
|-- | -----------------------------

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

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

The Bank, as a matter of state law, does not generally extend additional credit to any single borrower or group of
related borrowers in excess of 25% of statutory capital, or approximately $6,500,000. The State of Georgia recently enacted new legislation that has been signed into law by the governor which allows banks to renew existing debt that would exceed the
statutory capital limit subject to certain limitations.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|9) | REGULATORY MATTERS
|-- | ------------------



The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At March 31, 2010, no dividends could be declared without prior regulatory approval.

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

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

As a result of examination findings in mid 2009 by the Georgia Department of Banking and Finance, (the DBF)
and the Federal Deposit Insurance Corporation (the FDIC), (collectively, the Supervisory Authorities), the Banks Directors, on May 7, 2010, entered into a Stipulation and Consent Agreement with the Supervisory
Authorities agreeing to the issuance of a Consent Order (the Order). Specifically, the Order requires: increased involvement by the Banks Board of Directors; an assessment of current and future management and staffing needs;
reductions in adversely classified assets; improvement in the overall quality and management of the loan portfolio; adequate allowance for loan losses; a Tier I leverage capital ratio of not less than 8% and a Total Risk Based capital ratio of not
less than 10%; establishment of a plan to maintain adequate liquidity including a prohibition on accepting brokered deposits and a limitation on interest rates paid on all deposits; prior Supervisory Authority approval to pay cash dividends or Board
of Director compensation; and adoption of an annual strategic plan and budget. The Order also establishes a framework and timeframes for the Bank reporting on its compliance with the provisions of the Order. Most of the provisions of the proposed
Order are already being addressed by management, thus it is not contemplated that the Order will significantly change how the Bank is currently being operated. However, there can be no assurance that the Bank will be successful in meeting all of the
requirements of the Order.

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|9) | REGULATORY MATTERS, continued
|-- | -----------------------------



To be categorized as well capitalized, the Bank must maintain minimum
Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. At March 31, 2010, the Bank achieved a capital level for Tier 1 Risk Based Capital and Tier 1 Leverage Capital that would qualify as adequately
capitalized under the prompt corrective action framework. Because the Banks Total Risk Based Capital ratio does not meet the level to be considered adequately capitalized however, the Bank is considered, under the prompt corrective action
framework, undercapitalized as the lowest ratio determines the regulatory category. Prompt corrective action provisions are not applicable to bank holding companies.



|                           |  |              |   |  |      |   |  |                                      |  
|-------------------------- |  | ------------ | - |  | ---- | - |  | ------------------------------------ | -
|                           |  | Consolidated |   |  | Bank |   |  | WellCapitalizedRegulatoryRequirement |  
|                           |  |              |  
|Leverage Capital Ratios    |  | 4.30         | % |  | 4.27 | % |  | 5.00                                 | %
|                           |  |              |  
|Risk Based Capital Ratios: |  |              |   |  |      |   |  |                                      |  
|Tier 1                     |  | 5.15         | % |  | 5.11 | % |  | 6.00                                 | %
|Total                      |  | 6.42         | % |  | 6.38 | % |  | 10.00                                | %



|10) | FAIR VALUE OF ASSETS AND LIABILITIES
|--- | ------------------------------------

Determination of Fair Value

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

Fair Value Hierarchy

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

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

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

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

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

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

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

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

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

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

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

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



|                              |  |                                                           |       |                                           |   |                                        |  |                    |   |  |   |       
|----------------------------- |  | --------------------------------------------------------- | ----- | ----------------------------------------- | - | -------------------------------------- |  | ------------------ | - |  | - | ------
|                              |  | Fair Value Measurements at March 31, 2010 Using          
|(in thousands)                |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3) |  | TotalCarryingValue
|                              |  |                                                           |       |                                          
|Assets                        |  |                                                           |       |                                           |   |                                        |  |                    |   |  |   |       
|Securities available for sale |  | $                                                         | 4,304 |                                           | $ | 48,566                                 |  | $                  | - |  | $ | 52,870
|                              |  |                                                           |       |                                           |   |                                        |  |                    |   |  |   |       
|Total assets at fair value    |  | $                                                         | 4,304 |                                           | $ | 48,566                                 |  | $                  | - |  | $ | 52,870
|                              |  |                                                           |       |                                           |   |                                        |  |                    |   |  |   |       



|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|----------------------------- |  | --------------------------------------------------------- | ----- | ----------------------------------------- | - | --------------------------------------- |  | ------------------ | - |  | - | ------
|                              |  | Fair Value Measurements at December 31, 2009 Using       
|(in thousands)                |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | TotalCarryingValue
|                              |  |                                                           |       |                                          
|Assets                        |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|Securities available for sale |  | $                                                         | 1,211 |                                           | $ | 70,966                                  |  | $                  | - |  | $ | 72,177
|Loans held for sale           |  |                                                           | -     |                                           |   | 499                                     |  |                    | - |  |   | 499   
|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|Total assets at fair value    |  | $                                                         | 1,211 |                                           | $ | 71,465                                  |  | $                  | - |  | $ | 72,676
|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



Assets Measured at Fair Value on a Nonrecurring Basis: Under
certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the nonrecurring fair value changes made to financial instruments
carried on the consolidated balance sheet by caption for the periods ended March 31, 2010 and 2009.



|                  |  |                                                           |   |                                           |   |                                         |  |              |     |  |   |    
|----------------- |  | --------------------------------------------------------- | - | ----------------------------------------- | - | --------------------------------------- |  | ------------ | --- |  | - | ---
|                  |  | 2010 Fair Value Changes Based On:                        
|(in thousands)    |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | Total Losses
|                  |  |                                                           |   |                                          
|Impaired loans    |  | $                                                         | - |                                           | $ | 125                                     |  | $            | 155 |  | $ | 280
|Foreclosed assets |  |                                                           | - |                                           |   | 9                                       |  |              | 144 |  |   | 153
|                  |  |                                                           |   |                                           |   |                                         |  |              |     |  |   |    
|Total             |  | $                                                         | - |                                           | $ | 134                                     |  | $            | 299 |  | $ | 433
|                  |  |                                                           |   |                                           |   |                                         |  |              |     |  |   |    

In addition, the Bank had loans with a
Level 2 carrying amount of $3,956,000 which were transferred into foreclosed assets at a value of $7,301,000 resulting in a fair value adjustment in the amount of $3,345,000.



|                  |  |                                                           |   |                                           |   |                                         |  |              |        |  |   |       
|----------------- |  | --------------------------------------------------------- | - | ----------------------------------------- | - | --------------------------------------- |  | ------------ | ------ |  | - | ------
|                  |  | 2009 Fair Value Changes Based On:                        
|(in thousands)    |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | Total Losses
|                  |  |                                                           |   |                                          
|Impaired loans    |  | $                                                         | - |                                           | $ | -                                       |  | $            | 10,301 |  | $ | 10,301
|Foreclosed assets |  |                                                           | - |                                           |   | -                                       |  |              | 157    |  |   | 157   
|                  |  |                                                           |   |                                           |   |                                         |  |              |        |  |   |       
|Total             |  | $                                                         | - |                                           | $ | -                                       |  | $            | 10,458 |  | $ | 10,458
|                  |  |                                                           |   |                                           |   |                                         |  |              |        |  |   |       



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|10) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



In accordance with the provisions of the loan impairment guidance (FASB
ASC 310-10-35), individual loans and foreclosed properties with Level 2 carrying amounts of $44,055,000 and $18,214,000, respectively, were written down to their fair values of $43,930,000 and $18,205,000, resulting in impairment charges to earnings
in 2010 of $125,000 and $9,000, respectively. Individual loans and foreclosed properties with Level 3 carrying amounts of $38,286,000 and $46,408,000, respectively, were written down to their fair values of $38,131,000 and $46,264,000, resulting in
impairment charges to earnings in 2010 of $155,000 and $144,000, respectively. Fair values for impaired loans are estimated using the present value of expected cash flows discounted at the loans effective interest rate or the appraised value of the
underlying collateral discounted as necessary due to managements estimates of changes in economic conditions.

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

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



|                                                                                                 |  |                |         |                   |   |                |  |           |         |  |   |        
|------------------------------------------------------------------------------------------------ |  | -------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                                                                 |  | March 31, 2010 |         | December 31, 2009
|(in thousands)                                                                                   |  | CarryingAmount |         | FairValue         |   | CarryingAmount |  | FairValue
|                                                                                                 |  |                |         |                  
|Financial assets:                                                                                |  |                |         |                   |   |                |  |           |         |  |   |        
|Cash, interest-bearing deposits in banks, excess Federal Reserve balances and federal funds sold |  | $              | 46,169  |                   | $ | 46,169         |  | $         | 38,222  |  | $ | 38,222 
|Securities available for sale                                                                    |  |                | 52,870  |                   |   | 52,870         |  |           | 72,177  |  |   | 72,177 
|Securities held to maturity                                                                      |  |                | 695     |                   |   | 706            |  |           | 695     |  |   | 705    
|Restricted equity securities                                                                     |  |                | 1,266   |                   |   | 1,266          |  |           | 1,266   |  |   | 1,266  
|Loans held for sale                                                                              |  |                | -       |                   |   | -              |  |           | 499     |  |   | 499    
|Loans, net                                                                                       |  |                | 404,649 |                   |   | 408,305        |  |           | 421,567 |  |   | 425,531
|Accrued interest receivable                                                                      |  |                | 2,008   |                   |   | 2,008          |  |           | 2,222   |  |   | 2,222  
|                                                                                                 |  |                |         |                  
|Financial liabilities:                                                                           |  |                |         |                   |   |                |  |           |         |  |   |        
|Deposits                                                                                         |  | $              | 569,457 |                   | $ | 577,905        |  | $         | 586,101 |  | $ | 595,438
|Other borrowings                                                                                 |  |                | 1,277   |                   |   | 1,277          |  |           | 1,436   |  |   | 1,478  
|Accrued interest payable                                                                         |  |                | 1,493   |                   |   | 1,493          |  |           | 2,116   |  |   | 2,116  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|11) | SUBSEQUENT EVENTS
|--- | -----------------

The Bank has a line of credit in the amount of $2.4 million secured by assignment of mortgages, real estate and shares of
the Companys common stock. Although the loan was not delinquent at quarter end, the principals in the business have indicated that it has ceased operations. The principals, who are also guarantors on the line of credit, have agreed to a pledge
of additional collateral to the Bank, but following the period end, the Bank determined that a portion of the proposed additional collateral may not be clear of other encumbrances and therefore unavailable to secure the indebtedness of the line of
credit. The Bank is currently holding in excess of $350,000 in cash that can be applied against the debt in addition to the collateral pledged against the indebtedness. In addition, the Bank is in the process of preparing the legal documents
required to perfect its interest in the unencumbered additional collateral. Should the principals be unable or unwilling to pledge the additional collateral and/or generate sufficient income from their other business activities to repay the loan,
the Bank may be exposed to a collateral deficit of between $500,000 and $800,000. The Bank is continuing its efforts to minimize exposure to loss relating to this line of credit.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations

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

Cautionary Notice Regarding Forward-Looking Statements

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

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



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

| |  |  | difficult market conditions and economic trends;
| | - |  | ------------------------------------------------

| |  |  | our concentrations of residential and commercial construction and development loans;
| | - |  | ------------------------------------------------------------------------------------

| |  |  | continued deterioration in the metro Atlanta real estate markets;
| | - |  | -----------------------------------------------------------------

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

| |  |  | our ability to maintain liquidity or access other sources of funding;
| | - |  | ---------------------------------------------------------------------

| |  |  | changes in the cost and availability of funding;
| | - |  | ------------------------------------------------

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



| |  |  | changes in financial services laws and regulations;
| | - |  | ---------------------------------------------------

| |  |  | competition from financial institutions and other financial service providers;
| | - |  | ------------------------------------------------------------------------------

| |  |  | ability to retain key personnel;
| | - |  | --------------------------------

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

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

Overview

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

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

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

At March 31, 2010, we had total assets of $600 million, total loans of $418 million, total deposits of $570 million, and
stockholders equity of $27 million.

For the first three months of 2010, we earned $4.2 million compared to a loss of
$2.4 million for the same period in 2009. Our earnings resulted from a positive fair value adjustment on foreclosed properties, an improved net interest margin, and continued savings from cost reductions and operational efficiencies.

Even though we showed positive quarterly earnings for the first time since the first quarter of 2008, we continue to be negatively
impacted by economic conditions in our markets. The South Metropolitan Atlanta area and especially the Henry County economy has deteriorated along with the national economy due to depressed housing sales and real estate values as well as significant
local job losses due to reductions in construction and land development activity. The downturn



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



experienced in our market area has been greater than that nationally because of the areas significant dependence on the housing industry to drive the local economy.

The Companys nonperforming assets reflect the impact of slowed economic activity, depressed real estate values, reduced sales and a
challenging banking environment. Total nonperforming assets at March 31, 2010 were $148.0 million compared to $151.8 million at December 31, 2009. The slight reduction in nonperforming assets during the first quarter of 2010 reflects our
continued emphasis on reducing the level of our non-performing assets, plus indications that our markets are beginning to exhibit a return to economic stability and equilibrium. Net charge-offs amounted to $58,000 for the first quarter of 2010
compared to $1.3 million for the same period in 2009. At December 31, 2009, our allowance for loan losses was $13.3 million or 3.06% of loans compared to $13.7 million or 3.28% at March 31, 2010.

Critical Accounting Policies

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

Results of Operations

For the first three months of 2010, we earned $4.2 million compared to a loss of $2.4 million for the same period in 2009. Our earnings
resulted from a positive fair value adjustment on foreclosed properties, an improved net interest margin, and continued savings from cost reductions and operational efficiencies. Net cash provided by operating activities (operating cash
flow), which reflects net earnings or loss exclusive of noncash items, totaled $714,000 for the first quarter of 2010 compared to $424,000 for the first quarter of 2009. Operating cash flow is a significant liquidity measure that is critical
to a banks operations and continued viability.

Even though our net charge-offs declined for the quarter, we continued
to add to our allowance for loan losses. Our first quarter provision for loan losses totaled $469,000 compared to a first quarter 2009 provision of $1.6 million. In addition to providing for loan losses, we also continue to have fair value
adjustment to foreclosed properties. For the three months ended March 31, 2010, we recognized $3.0 million in net gains, primarily related to properties recorded at fair value upon foreclosure, compared to net losses of $577,000 for the first
three months of 2009.



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



|                                                     |  |                             |        |   |      |   |    
|---------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ---
|                                                     |  | Three months endedMarch 31,
|(in thousands)                                       |  | 2010                        |        |   | 2009
|                                                     |  |                            
|Fair value adjustment:                               |  |                             |        |   |      |   |    
|(Gain) on loans transferred to foreclosed properties |  | $                           | (3,345 | ) |      | $ | -  
|Impairment charges on foreclosed properties          |  |                             | 153    |   |      |   | 157
|                                                     |  |                            
|Loss on sale of foreclosed properties                |  |                             | 111    |   |      |   | 420
|                                                     |  |                             |        |   |      |   |    
|                                                     |  |                            
|Total gains (losses), net                            |  | $                           | (3,081 | ) |      | $ | 577
|                                                     |  |                             |        |   |      |   |    



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



Table 1-Financial Highlights

Selected Financial Information



|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|----------------------------------------------- |  | ------------ | ---------- | - | ------------- | - | ---------- | ------------ |  | - | ------------- | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                |  | 2010         |            |   | 2009          |  
|(in thousands, except per share and other data) |  | FirstQuarter |            |   | FourthQuarter |   |            | ThirdQuarter |  |   | SecondQuarter |   |  | FirstQuarter |           
|SUMMARY OF OPERATIONS                           |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Interest income                                 |  | $            | 5,682      |   |               | $ | 5,009      |              |  | $ | 5,796         |   |  | $            | 3,946      |   |  | $ | 6,597      |  
|Interest expense                                |  |              | 2,860      |   |               |   | 3,357      |              |  |   | 3,741         |   |  |              | 3,804      |   |  |   | 3,850      |  
|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Net interest income                             |  |              | 2,822      |   |               |   | 1,652      |              |  |   | 2,055         |   |  |              | 142        |   |  |   | 2,747      |  
|Provision for loan losses                       |  |              | 469        |   |               |   | 24,850     |              |  |   | 378           |   |  |              | 12,340     |   |  |   | 1,600      |  
|Other operating income                          |  |              | 1,469      |   |               |   | 724        |              |  |   | 832           |   |  |              | 706        |   |  |   | 329        |  
|Other expenses (income)                         |  |              | (347       | ) |               |   | 5,516      |              |  |   | 3,552         |   |  |              | 4,859      |   |  |   | 3,853      |  
|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Earnings (loss) before income taxes             |  |              | 4,169      |   |               |   | (27,990    | )            |  |   | (1,043        | ) |  |              | (16,351    | ) |  |   | (2,377     | )
|Income tax expense (benefit)                    |  |              | -          |   |               |   | (11,109    | )            |  |   | -             |   |  |              | -          |   |  |   | -          |  
|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Net earnings (losses)                           |  | $            | 4,169      |   |               | $ | (16,881    | )            |  | $ | (1,043        | ) |  | $            | (16,351    | ) |  | $ | (2,377     | )
|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|PERFORMANCE MEASURES                            |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Per common share:                               |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Earnings (loss) per share                       |  | $            | 0.29       |   |               | $ | (1.18      | )            |  | $ | (0.07         | ) |  | $            | (1.15      | ) |  | $ | (0.17      | )
|Cash dividends per share                        |  |              | -          |   |               |   | -          |              |  |   | -             |   |  |              | -          |   |  |   | -          |  
|Book value                                      |  |              | 1.87       |   |               |   | 1.64       |              |  |   | 2.79          |   |  |              | 2.84       |   |  |   | 4.01       |  
|Profitability ratios:                           |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Return on average equity                        |  |              | 63.53%     |   |               |   | -214.00%   |              |  |   | -10.41%       |   |  |              | -134.18%   |   |  |   | -14.45%    |  
|Return on average assets                        |  |              | 2.75%      |   |               |   | -10.66%    |              |  |   | -0.63%        |   |  |              | -9.75%     |   |  |   | -1.41%     |  
|Net interest margin                             |  |              | 2.19%      |   |               |   | 1.19%      |              |  |   | 1.35%         |   |  |              | 0.09%      |   |  |   | 1.76%      |  
|Liquidity ratios:                               |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Total loans to total deposits                   |  |              | 73.47%     |   |               |   | 74.20%     |              |  |   | 79.36%        |   |  |              | 79.12%     |   |  |   | 87.58%     |  
|Average loans to average earning assets         |  |              | 82.53%     |   |               |   | 85.21%     |              |  |   | 81.09%        |   |  |              | 83.96%     |   |  |   | 85.06%     |  
|Noninterest-bearing deposits to total deposits  |  |              | 12.59%     |   |               |   | 11.13%     |              |  |   | 11.14%        |   |  |              | 10.51%     |   |  |   | 11.22%     |  
|Capital ratios:                                 |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Leverage                                        |  |              | 4.30%      |   |               |   | 3.38%      |              |  |   | 5.79%         |   |  |              | 5.92%      |   |  |   | 8.61%      |  
|Risk-based capital                              |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Tier 1                                          |  |              | 5.15%      |   |               |   | 4.30%      |              |  |   | 7.42%         |   |  |              | 7.40%      |   |  |   | 10.20%     |  
|Total                                           |  |              | 6.42%      |   |               |   | 5.55%      |              |  |   | 8.69%         |   |  |              | 8.67%      |   |  |   | 11.47%     |  
|ASSET QUALITY                                   |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Non-performing loans                            |  | $            | 83,580     |   |               | $ | 102,029    |              |  | $ | 94,025        |   |  | $            | 107,334    |   |  | $ | 87,425     |  
|Foreclosed properties                           |  |              | 64,469     |   |               |   | 49,732     |              |  |   | 35,903        |   |  |              | 28,037     |   |  |   | 17,238     |  
|                                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Total non-performing assets (NPAs)              |  |              | 148,049    |   |               |   | 151,761    |              |  |   | 129,928       |   |  |              | 135,371    |   |  |   | 104,663    |  
|Allowance for loan losses                       |  |              | 13,735     |   |               |   | 13,324     |              |  |   | 14,571        |   |  |              | 15,171     |   |  |   | 17,997     |  
|Net charge-offs                                 |  |              | 58         |   |               |   | 26,096     |              |  |   | 978           |   |  |              | 15,166     |   |  |   | 1,334      |  
|Allowance for loan losses to loans              |  |              | 3.28%      |   |               |   | 3.06%      |              |  |   | 3.02%         |   |  |              | 3.06%      |   |  |   | 3.39%      |  
|Net charge-offs to average loans                |  |              | 0.01%      |   |               |   | 5.52%      |              |  |   | 0.20%         |   |  |              | 2.91%      |   |  |   | 0.25%      |  
|NPAs to loans and foreclosed properties         |  |              | 30.66%     |   |               |   | 31.32%     |              |  |   | 25.05%        |   |  |              | 25.81%     |   |  |   | 19.11%     |  
|NPAs to total assets                            |  |              | 24.66%     |   |               |   | 24.69%     |              |  |   | 19.91%        |   |  |              | 20.09%     |   |  |   | 15.68%     |  
|AVERAGE BALANCES                                |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Loans                                           |  | $            | 431,729    |   |               | $ | 472,626    |              |  | $ | 495,245       |   |  | $            | 521,762    |   |  | $ | 538,777    |  
|Investment securities                           |  |              | 57,810     |   |               |   | 72,815     |              |  |   | 72,800        |   |  |              | 72,149     |   |  |   | 65,023     |  
|Earning assets                                  |  |              | 523,121    |   |               |   | 554,631    |              |  |   | 610,710       |   |  |              | 621,464    |   |  |   | 633,425    |  
|Total assets                                    |  |              | 606,236    |   |               |   | 633,543    |              |  |   | 663,058       |   |  |              | 670,680    |   |  |   | 676,168    |  
|Deposits                                        |  |              | 575,076    |   |               |   | 597,216    |              |  |   | 617,906       |   |  |              | 616,607    |   |  |   | 604,953    |  
|Stockholders equity                            |  |              | 26,247     |   |               |   | 31,553     |              |  |   | 40,094        |   |  |              | 48,745     |   |  |   | 65,779     |  
|Weighted average shares                         |  |              | 14,245,690 |   |               |   | 14,245,690 |              |  |   | 14,245,690    |   |  |              | 14,245,690 |   |  |   | 14,245,690 |  
|AT QUARTER END                                  |  |              |            |   |               |   |            |              |  |   |               |   |  |              |            |   |  |   |            |  
|Loans                                           |  | $            | 418,384    |   |               | $ | 434,891    |              |  | $ | 482,784       |   |  | $            | 496,473    |   |  | $ | 530,510    |  
|Investment securities                           |  |              | 53,565     |   |               |   | 72,872     |              |  |   | 72,757        |   |  |              | 72,843     |   |  |   | 71,454     |  
|Total assets                                    |  |              | 600,269    |   |               |   | 614,648    |              |  |   | 652,438       |   |  |              | 673,678    |   |  |   | 667,682    |  
|Deposits                                        |  |              | 569,457    |   |               |   | 586,101    |              |  |   | 608,331       |   |  |              | 627,481    |   |  |   | 605,732    |  
|Stockholders equity                            |  |              | 26,619     |   |               |   | 23,327     |              |  |   | 39,779        |   |  |              | 40,409     |   |  |   | 57,080     |  
|Common shares outstanding                       |  |              | 14,245,690 |   |               |   | 14,245,690 |              |  |   | 14,245,690    |   |  |              | 14,245,690 |   |  |   | 14,245,690 |  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



Net Interest Income

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

The average yield on interest earning assets increased and the average cost of interest bearing liabilities declined for the first
quarter of 2010 compared to the first quarter of 2009 resulting in a net interest margin for the first quarter of 2.19% compared to 1.76% for the same period in 2009. For the first three months of 2010, the yield on average interest earning assets
was 4.41%, an increase from 4.22% for the same period in 2009. The impact of interest adjustments from loans placed on nonaccrual status and the collection of interest on nonaccrual loans impacted the yield in both periods. During the first three
months of 2010 some customers cured defaults that brought their loans current and allowed the Bank to recognize interest income that had previously been reversed in the amount of $626,000. During the first quarter of 2009, the Bank reversed $531,000
in interest income on loans placed on nonaccrual. Absent these adjustments, the yield on earning assets for the first quarter of 2010 and 2009 would have been 3.92% and 4.56% respectively. The decrease in the adjusted yield on average interest
earning assets is the result of the increase in nonperforming assets. In addition, the overall decline in interest rates has translated into a decrease in fixed rates on new and renewed loans in the first quarter of 2010. The cost of interest
bearing liabilities for the first quarter was 2.27% for 2010 compared to 2.89% for the same period in 2009. The decline in the cost of interest bearing liabilities is reflective of the overall decline in interest rates and the decline in funding
needs of the Bank due to decreased loan demand. The decline in funding needs has allowed the Bank to not renew higher cost, non customer related deposits, which has helped reduce the overall cost of interest bearing liabilities and reduce the
overall balance sheet.

For the first quarter, net interest income totaled $2.8 million in 2010 compared to $2.7 million for
the same period in 2009. Net interest income for the two periods, adjusted for the impact on interest earned and reversed on nonaccrual loans, totaled $2.2 million for the first quarter of 2010 compared to $3.3 million for the same period in 2009,
an adjusted margin for the two periods of 1.70% and 2.10% respectively.



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

For the three months ended March 31, 2010 and 2009



|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|------------------------------------------------------- |  | -------------- | ------- | - | -------- | - | ----------- |  | ---- | -------------- |  | - | -------- | - | ----------- | - | ----- |  | ---- | -
|                                                        |  | 2010           |         |   | 2009     |  
|(in thousands)                                          |  | AverageBalance |         |   | Interest |   | AverageRate |  |      | AverageBalance |  |   | Interest |   | AverageRate |  
|Assets:                                                 |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Interest-earning assets:                                |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Loans (1)                                               |  | $              | 431,729 |   |          | $ | 5,122       |  | 4.81 | %              |  | $ | 538,777  |   |             | $ | 5,921 |  | 4.46 | %
|Taxable securities
(2)(3)                               |  |                | 52,946  |   |          |   | 490         |  | 3.75 | %              |  |   | 59,375   |   |             |   | 615   |  | 4.20 | %
|Tax-exempt securities
(2)(4)                            |  |                | 4,864   |   |          |   | 48          |  | 4.00 | %              |  |   | 5,648    |   |             |   | 49    |  | 3.52 | %
|Overnight investments and other interest-earning assets |  |                | 33,582  |   |          |   | 22          |  | 0.27 | %              |  |   | 29,625   |   |             |   | 12    |  | 0.16 | %
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total interest-earning assets                           |  |                | 523,121 |   |          |   | 5,682       |  | 4.41 | %              |  |   | 633,425  |   |             |   | 6,597 |  | 4.22 | %
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Non-interest-earning assets:                            |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Allowance for loan losses                               |  |                | (17,372 | ) |          |   |             |  |      |                |  |   | (15,639  | ) |             |   |       |  |      |  
|Cash and due from banks                                 |  |                | 11,427  |   |          |   |             |  |      |                |  |   | 13,078   |   |             |   |       |  |      |  
|Other assets                                            |  |                | 89,060  |   |          |   |             |  |      |                |  |   | 45,304   |   |             |   |       |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total assets                                            |  | $              | 606,236 |   |          |   |             |  |      |                |  | $ | 676,168  |   |             |   |       |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Liabilities and Stockholders Equity:                   |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Interest-bearing liabilities:                           |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Interest-bearing deposits:                              |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|NOW                                                     |  | $              | 56,874  |   |          | $ | 69          |  | 0.49 | %              |  | $ | 57,758   |   |             | $ | 70    |  | 0.49 | %
|Money market                                            |  |                | 36,517  |   |          |   | 54          |  | 0.60 | %              |  |   | 45,544   |   |             |   | 79    |  | 0.70 | %
|Savings                                                 |  |                | 32,273  |   |          |   | 39          |  | 0.49 | %              |  |   | 30,409   |   |             |   | 55    |  | 0.74 | %
|Time deposits less than $100,000                        |  |                | 207,261 |   |          |   | 1,410       |  | 2.76 | %              |  |   | 214,167  |   |             |   | 1,981 |  | 3.75 | %
|Time deposits greater than $100,000                     |  |                | 124,157 |   |          |   | 903         |  | 2.95 | %              |  |   | 136,181  |   |             |   | 1,271 |  | 3.78 | %
|Brokered deposits                                       |  |                | 52,787  |   |          |   | 374         |  | 2.88 | %              |  |   | 54,938   |   |             |   | 380   |  | 2.81 | %
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total interest-bearing deposits                         |  |                | 509,869 |   |          |   | 2,849       |  | 2.27 | %              |  |   | 538,997  |   |             |   | 3,836 |  | 2.89 | %
|Other borrowings                                        |  |                | 1,468   |   |          |   | 11          |  | 2.90 | %              |  |   | 2,137    |   |             |   | 14    |  | 2.70 | %
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total interest-bearing liabilities                      |  |                | 511,337 |   |          |   | 2,860       |  | 2.27 | %              |  |   | 541,134  |   |             |   | 3,850 |  | 2.89 | %
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Non-interest-bearing liabilities:                       |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Non-interest-bearing deposits                           |  |                | 65,207  |   |          |   |             |  |      |                |  |   | 65,956   |   |             |   |       |  |      |  
|Other liabilities                                       |  |                | 3,445   |   |          |   |             |  |      |                |  |   | 3,299    |   |             |   |       |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total liabilities                                       |  |                | 579,989 |   |          |   |             |  |      |                |  |   | 610,389  |   |             |   |       |  |      |  
|Stockholders equity                                    |  |                | 26,247  |   |          |   |             |  |      |                |  |   | 65,779   |   |             |   |       |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Total liabilities and stockholders equity              |  | $              | 606,236 |   |          |   |             |  |      |                |  | $ | 676,168  |   |             |   |       |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Net interest revenue                                    |  |                |         |   |          | $ | 2,822       |  |      |                |  |   |          |   |             | $ | 2,747 |  |      |  
|                                                        |  |                |         |   |          |   |             |  |      |                |  |   |          |   |             |   |       |  |      |  
|Net interest-rate spread                                |  |                |         |   |          |   |             |  | 2.14 | %              |  |   |          |   |             |   |       |  | 1.34 | %
|Net interest margin
(5)                                 |  |                |         |   |          |   |             |  | 2.19 | %              |  |   |          |   |             |   |       |  | 1.76 | %



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

|(2) | Securities available for sale are shown at amortized cost. Average pretax unrealized gains of $666,000 for the three months ended March 31,
2010 and $829,000 for the three months ended March 31, 2009 are included in other assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes restricted equity securities.
|--- | --------------------------------------

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

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



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Table 3- Changes in Interest Income and Interest Expense



|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | - | ---- | - | ----- | ----- |  | - | ---- | -
|                                                        |  | 2010 Compared to 2009Increase (decrease)
due to changes in |       
|(in thousands)                                          |  | Volume                                                     |        |   | Rate |   |       | Total | 
|Interest-earning assets:                                |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Loans                                                   |  | $                                                          | (1,176 | ) |      | $ | 377   |       |  | $ | (799 | )
|Taxable securities                                      |  |                                                            | (67    | ) |      |   | (58   | )     |  |   | (125 | )
|Tax-exempt securities                                   |  |                                                            | (7     | ) |      |   | 6     |       |  |   | (1   | )
|Overnight investments and other interest-earning assets |  |                                                            | 2      |   |      |   | 8     |       |  |   | 10   |  
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Total interest-earning assets                           |  |                                                            | (1,248 | ) |      |   | 333   |       |  |   | (915 | )
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|                                                        |  |                                                            |       
|Interest-bearing liabilities:                           |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Interest-bearing deposits:                              |  |                                                            |        |   |      |   |       |       |  |   |      |  
|NOW                                                     |  |                                                            | (1     | ) |      |   |      |       |  |   | (1   | )
|Money market                                            |  |                                                            | (16    | ) |      |   | (9    | )     |  |   | (25  | )
|Savings                                                 |  |                                                            | 3      |   |      |   | (19   | )     |  |   | (16  | )
|Time deposits less than $100,000                        |  |                                                            | (64    | ) |      |   | (507  | )     |  |   | (571 | )
|Time deposits greater than $100,000                     |  |                                                            | (112   | ) |      |   | (256  | )     |  |   | (368 | )
|Brokered deposits                                       |  |                                                            | (15    | ) |      |   | 9     |       |  |   | (6   | )
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Total interest-bearing deposits                         |  |                                                            | (205   | ) |      |   | (782  | )     |  |   | (987 | )
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Other borrowings                                        |  |                                                            | (4     | ) |      |   | 1     |       |  |   | (3   | )
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Total interest-bearing liabilities                      |  |                                                            | (209   | ) |      |   | (781  | )     |  |   | (990 | )
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  
|Increase (decrease) in net interest revenue             |  | $                                                          | (1,039 | ) |      | $ | 1,114 |       |  | $ | 75   |  
|                                                        |  |                                                            |        |   |      |   |       |       |  |   |      |  

Provision for Loan Losses

The provision for loan losses amounted to $469,000 for the first quarter of 2010, a decrease of $1.1 million over the 2009 first quarter
provision. The amounts provided in each period is indicative of our assessment of the inherent risk in the loan portfolio at March 31, 2010 and 2009 and reflects the impact of the economic slowdown on our loan portfolio. The allowance for loan
losses as a percentage of total loans was 3.28% at March 31, 2010 as compared to 3.06% at December 31, 2009. The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately cover all known and
inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a continuing review of



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loan loss experience, current economic conditions which may affect the borrowers ability to repay and the underlying collateral value.

Other Operating Income

Other income, not counting securities gains or losses, was $656,000 for the first three months of 2010, an increase of 8.61% compared to
the same period in 2009. Service charges on deposit accounts increased by $135,000 or 43.8% over the first quarter of 2009, primarily attributable to an increase in insufficient funds charges resulting from the introduction of a courtesy overdraft
privilege program during the second quarter of 2009. Securities gains totaled $813,000 for the first quarter 2010, compared to a loss of $275,000 for the first quarter of 2009. Mortgage banking income, reflecting our decision to exit that business
in December, declined from $95,000 during the first quarter of 2009 to $13,000 for the first quarter of 2010. Mortgage revenue recognized during the first quarter of 2010 reflects the amounts attributed to the sale of the mortgage loans in the
pipeline when we suspended our mortgage operations.

Other Expenses

Other expenses, not including net foreclosed properties expenses (income), declined $540,000 or 17.4% for the first three months of 2010
compared to the same period in 2009. Expense control initiatives were responsible for declines in salaries and employee benefits of $399,000 and in occupancy and equipment expenses of $82,000 for the first quarter of 2010 compared to the same period
in 2009. The reduction in salaries and employee benefits is attributable to reduction in staffing levels through attrition and maintaining salaries and benefits at 2008 levels. Other operating expenses decreased by $300,000 for the first quarter of
2010 compared to the first quarter of 2009. Other significant cost reductions have occurred when comparing first quarter 2010 to first quarter of 2009. ATM processing fees and correspondent bank charges have declined approximately $70,000; Director
Fees declined by $40,000 in the first quarter and have now been totally eliminated going forward; and legal fees and supplies have each declined by $20,000. The cost savings generated were partially offset by a first quarter 2010 increase in FDIC
and regulatory fees of $241,000 over the same period in 2009.

Foreclosed properties expenses (income) totaled ($2.9) million
for the first quarter of 2010 compared to $743,000 for the first quarter of 2009. A positive fair value adjustment on loans transferred to foreclosed properties resulted in a net gain of $3.2 million in the first quarter of 2010. The Company
recorded a negative fair value adjustment, for a loss during the first quarter of 2009 in the amount of $172,000. For the three months ended March 31, 2010 and 2009, losses on the sale of foreclosed properties were $111,000 and $420,000,
respectively.

Income Taxes

There was no income tax expense or (benefit) recognized for either the first quarter 2010 or 2009.

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



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Balance Sheet Review

Total assets at March 31, 2010 and December 31, 2009 were $600.3 million, and $614.6 million, respectively. Average total
assets for the first quarter of 2010 were $606.2 million, down $70.0 million or 10.3% from $676.2 million in the first quarter of 2009.

Loans

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

Table 4- Loans Outstanding



|                          |  |               |         |   |                  |   |         |  
|------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands)            |  | March 31,2010 |         |   | December 31,2009 |  
|                          |  |              
|Real estate-commercial    |  |               |         |   |                  |   |         |  
|Owner occupied            |  | $             | 163,039 |   |                  | $ | 170,410 |  
|Non-owner occupied        |  |               | 17,155  |   |                  |   | 14,793  |  
|Real estate-construction  |  |               | 166,103 |   |                  |   | 175,527 |  
|Real estate-1-4 family    |  |               | 52,630  |   |                  |   | 54,332  |  
|Commercial                |  |               | 14,063  |   |                  |   | 14,396  |  
|Consumer                  |  |               | 5,423   |   |                  |   | 5,468   |  
|                          |  |               |         |   |                  |   |         |  
|                          |  |               | 418,413 |   |                  |   | 434,926 |  
|                          |  |              
|Deferred loan fees        |  |               | (29     | ) |                  |   | (35     | )
|Allowance for loan losses |  |               | (13,735 | ) |                  |   | (13,324 | )
|                          |  |               |         |   |                  |   |         |  
|Loans, net                |  | $             | 404,649 |   |                  | $ | 421,567 |  
|                          |  |               |         |   |                  |   |         |  

At March 31, 2010, total loans were $404.6 million, a decline of $16.9 million or 4.01% from
December 31, 2009. The decline in loans is the result of problem loans transitioning to foreclosed properties and stagnant growth, both due to the economic deterioration in the Henry County market due to depressed housing sales and real estate
values as well as significant local job losses due to reductions in construction and land development activity.



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Asset Quality and Risk Elements

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

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

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



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The following table presents a summary of the changes in the allowance for loan losses
for the three months ended March 31, 2010 and 2009.

Table 5- Allowance for Loan Losses



|                                                    |  |                             |         |   |      |   |         |  
|--------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                    |  | Three months endedMarch 31, |        
|(in thousands)                                      |  | 2010                        |         |   | 2009 |  
|                                                    |  |                            
|Allowance at beginning of the period                |  | $                           | 13,324  |   |      | $ | 17,730  |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Loans charged off:                                  |  |                             |         |   |      |   |         |  
|Real estate                                         |  |                             | (124    | ) |      |   | (1,341  | )
|Commercial                                          |  |                             | -       |   |      |   | -       |  
|Consumer                                            |  |                             | (7      | ) |      |   | -       |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                             | (131    | ) |      |   | (1,341  | )
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Recoveries:                                         |  |                             |         |   |      |   |         |  
|Real estate                                         |  |                             | 60      |   |      |   | -       |  
|Commercial                                          |  |                             | -       |   |      |   | -       |  
|Consumer                                            |  |                             | 13      |   |      |   | 8       |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                             | 73      |   |      |   | 8       |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Net (charge-offs)                                   |  |                             | (58     | ) |      |   | (1,333  | )
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Additions to allowance charged to operating expense |  |                             | 469     |   |      |   | 1,600   |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Balance at end of the period                        |  | $                           | 13,735  |   |      | $ | 17,997  |  
|                                                    |  |                             |         |   |      |   |         |  
|                                                    |  |                            
|Total loans:                                        |  |                             |         |   |      |   |         |  
|At period end                                       |  | $                           | 418,384 |   |      | $ | 530,510 |  
|Average                                             |  |                             | 431,729 |   |      |   | 538,777 |  
|                                                    |  |                            
|Allowance as percentage of year end loans           |  |                             | 3.28    | % |      |   | 3.39    | %
|                                                    |  |                            
|As a percentage of average loans:                   |  |                             |         |   |      |   |         |  
|Net charge-offs                                     |  |                             | 0.01    | % |      |   | 0.25    | %
|Provision for loan losses                           |  |                             | 0.11    | % |      |   | 0.30    | %



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

Management believes that the
allowance for loan losses at March 31, 2010 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision
and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the
results of their review warrant such additions. See the Critical Accounting Policies section in our 2009 Annual Report on Form 10-K for additional information on the allowance for loan losses.



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Nonperforming Assets

Our bank is located in what has historically been one of the fastest growing areas of the United States, south Metro Atlanta. A large
number of our loans were to developers and contractors to purchase land, develop subdivisions and build houses to meet the growing population. The slowing economy has impacted many of our customers, causing stress in our portfolio, and increasing
our nonperforming assets, which include nonperforming loans and foreclosed properties. Total nonperforming assets amounted to $148.0 million and $151.7 million at March 31, 2010 and December 31, 2009, respectively. The following table
summarizes our nonperforming assets by type.

Table 6- Nonperforming Assets



|                                                        |  |               |         |   |                  |   |         |  
|------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands)                                          |  | March 31,2010 |         |   | December 31,2009 |  
|                                                        |  |              
|Nonaccrual loans (NPLs)                                 |  | $             | 81,780  |   |                  | $ | 101,558 |  
|                                                        |  |              
|Loans past due 90 days or more and still accruing       |  |               | 1,800   |   |                  |   | 471     |  
|                                                        |  |               |         |   |                  |   |         |  
|                                                        |  |              
|Total nonperforming loans                               |  | $             | 83,580  |   |                  | $ | 102,029 |  
|                                                        |  |              
|Foreclosed properties                                   |  |               | 64,469  |   |                  |   | 49,732  |  
|                                                        |  |               |         |   |                  |   |         |  
|                                                        |  |              
|Total nonperforming assets (NPAs)                       |  | $             | 148,049 |   |                  | $ | 151,761 |  
|                                                        |  |               |         |   |                  |   |         |  
|                                                        |  |              
|NPLs as a percentage of total loans                     |  |               | 19.98   | % |                  |   | 23.46   | %
|NPAs as a percentage of loans and foreclosed properties |  |               | 30.66   | % |                  |   | 31.32   | %
|NPAs as a percentage of total assets                    |  |               | 24.66   | % |                  |   | 24.69   | %

In addition to these
amounts, the Company had troubled debt restructurings that were performing in accordance with their modified terms of $4,121,000 in residential mortgages, $14,283,000 in construction loans, $8,985,000 in commercial real estate loans and $2,014,000
in commercial loans at March 31, 2010.

Nonperforming loans, which include non-accrual loans and accruing loans past due
over 90 days, totaled $83.6 million or 20.0% of total loans at March 31, 2010, compared with $102.0 million (23.5%) at December 31, 2009, respectively.



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The following table summarizes nonperforming assets by category.

Table 7- Nonperforming Assets (NPAs) by Category

(dollars in thousands)



|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|---------------------------------------- |  | ------------------- | ------ | -------------------- | - | ------ |  | ------------------- | ------- | -------------------- | - | ------- |  | - | ------ |  | - | -------
|                                         |  | March 31, 2010      |        | December 31, 2009   
|Loan type                                |  | Non-PerformingLoans |        | ForeclosedProperties |   | Total  |  | Non-PerformingLoans |         | ForeclosedProperties |   | Total  
|                                         |  |                     |        |                      |   |       
|Real estate-commercial                   |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Owner occupied                           |  | $                   | 4,804  |                      | $ | -      |  | $                   | 4,804   |                      | $ | 9,917   |  | $ | -      |  | $ | 9,917  
|Non-owner occupied                       |  |                     | 5,171  |                      |   | 5,810  |  |                     | 10,981  |                      |   | 5,169   |  |   | 4,612  |  |   | 9,781  
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Total real estate-commercial             |  |                     | 9,975  |                      |   | 5,810  |  |                     | 15,785  |                      |   | 15,086  |  |   | 4,612  |  |   | 19,698 
|Real estate construction and development |  |                     | 67,013 |                      |   | 47,010 |  |                     | 114,023 |                      |   | 79,514  |  |   | 32,931 |  |   | 112,445
|Real estate 1-4 family                   |  |                     | 5,545  |                      |   | 11,649 |  |                     | 17,194  |                      |   | 6,369   |  |   | 12,189 |  |   | 18,558 
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Total real estate loans                  |  |                     | 82,533 |                      |   | 64,469 |  |                     | 147,002 |                      |   | 100,969 |  |   | 49,732 |  |   | 150,701
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Commercial loans                         |  |                     | 1,011  |                      |   | -      |  |                     | 1,011   |                      |   | 1,014   |  |   | -      |  |   | 1,014  
|Consumer loans                           |  |                     | 36     |                      |   | -      |  |                     | 36      |                      |   | 46      |  |   | -      |  |   | 46     
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Total commercial and consumer loans      |  |                     | 1,047  |                      |   | -      |  |                     | 1,047   |                      |   | 1,060   |  |   | -      |  |   | 1,060  
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        
|Total NPAs                              |  | $                   | 83,580 |                      | $ | 64,469 |  | $                   | 148,049 |                      | $ | 102,029 |  | $ | 49,732 |  | $ | 151,761
|                                         |  |                     |        |                      |   |        |  |                     |         |                      |   |         |  |   |        |  |   |        

The following tables summarize the composition of our
foreclosed properties at March 31, 2010.

Table 8- Composition of Foreclosed Properties



|                       |  |         |        |          |       
|---------------------- |  | ------- | ------ | -------- | ------
|(dollars in thousands) |  | Balance |        | Percent*
|                       |  |        
|Developments           |  | $       | 14,666 |          | 22.75 
|Raw Land               |  |         | 21,750 |          | 33.74 
|Houses                 |  |         | 11,649 |          | 18.07 
|Lots                   |  |         | 10,594 |          | 16.43 
|Commercial Real Estate |  |         | 5,810  |          | 9.01  
|                       |  |         |        |          |       
|Total                  |  | $       | 64,469 |          | 100.00
|                       |  |         |        |          |       

*Percent of total
foreclosed properties

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair
value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less estimated costs to sell, of the foreclosed property
decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds
and the carrying amount of the property. For the three months ended March 31, 2010 and 2009, the Company transferred $13.0 million and $1.6 million, respectively, of loans into foreclosed



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property. During the first quarter of 2010, proceeds from cash sales of foreclosed properties were $1.4 million.

Investment Securities

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds,
furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Securities available for sale at March 31, 2010 decreased $19.3 million from December 31, 2009.

Deposits

Total average deposits for the first quarter of 2010 were $575 million compared to $605 million for the first quarter of 2009. Although
deposits were down in all categories, the majority of the decline was centered in money market accounts and time deposits as we lowered our deposit rates to reflect slowing demand on the asset side of the balance sheet, resulting in some customers
moving funds to higher yielding investments. With diminished loan demand, we have sufficient liquidity to fund our balance sheet without relying on funding other than customer deposits. Because we are not well-capitalized under prompt corrective
action, we are unable to renew existing brokered certificates. During the first quarter of 2010, we paid off $18.6 million in brokered deposits that matured. We do not plan on increasing our brokered certificates in the near future and have
sufficient liquidity to pay off the brokered certificates as they mature.

Other Funding Sources

The Bank is a shareholder in the Federal Home Loan Bank (FHLB) of Atlanta. Through this affiliation, advances, secured by a
portion of our investment portfolio, totaling $1.1 million were outstanding at March 31, 2010. These advances were repaid in full when they matured in April 2010.

At March 31, 2010, the Bank had sufficient qualifying collateral pledged to the Federal Reserve Bank of Atlanta to secure discount
window capacity of approximately $23 million.

Liquidity

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals,
and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A company may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by
operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the
maturity structure of liabilities, and accessibility to market sources of funds.



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Scheduled loan payments are a relatively stable source of funds, but loan payoffs and
deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits to meet asset/liability objectives consistent with local market conditions.

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

At March 31,
2010 we had loan commitments outstanding of $31 million and standby letters of credit of $3 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.

As disclosed in the Companys consolidated statement of cash flows, net
cash provided by operating activities was $714,000 for the quarter ended March 31, 2010. Net earnings of $4.2 million included non-cash gains relating to the fair market valuation of foreclosed properties in the amount of $3.2 million and
securities gains of $813,000. Net cash provided by investing activities of $16.0 million consisted primarily of cash provided from a decrease in investment securities of $19.2 million offset by an $8.0 million increase in overnight balances and
interest bearing deposits in banks. The $16.8 million of net cash used in financing activities consisted primarily of a net decrease in deposits of $16.6 million. In the opinion of management, the Companys liquidity position at
March 31, 2010 is sufficient to meet its expected cash flow requirements.



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Capital Resources

At March 31, 2010, we were considered undercapitalized under regulatory guidelines. The minimum capital requirements to be
considered well capitalized under prompt corrective action provisions and the actual capital ratios for Henry County Bancshares, Inc. and the Bank as of March 31, 2010 are as follows:



|                           |  |              |  |       |  |                                      
|-------------------------- |  | ------------ |  | ----- |  | -------------------------------------
|                           |  | Consolidated |  | Bank  |  | Well CapitalizedRegulatoryRequirement
|                           |  |              | 
|Leverage Capital Ratios    |  | 4.30%        |  | 4.27% |  | 5.00%                                
|                           |  |              | 
|Risk Based Capital Ratios: |  |              |  |       |  |                                      
|Tier 1                     |  | 5.15%        |  | 5.11% |  | 6.00%                                
|Total                      |  | 6.42%        |  | 6.38% |  | 10.00%                               

Subsequent
Events

The Bank has a line of credit in the amount of $2.4 million secured by assignment of mortgages, real estate and
shares of the Companys common stock. Although the loan was not delinquent at quarter end, the principals in the business have indicated that it has ceased operations. The principals, who are also guarantors on the line of credit, have agreed
to a pledge of additional collateral to the Bank, but following the period end, the Bank determined that a portion of the proposed additional collateral may not be clear of other encumbrances and therefore unavailable to secure the line of credit.
The Bank is currently holding in excess of $350,000 in cash that can be applied against the debt in addition to the collateral pledged against the indebtedness. In addition, the Bank is in the process of preparing the legal documents required to
perfect its interest in the unencumbered additional collateral. Should the principals be unable or unwilling to pledge the additional collateral and/or generate sufficient income from their other business activities to repay the loan, the Bank may
be exposed to a collateral deficit of between $500,000 and $800,000. The Bank is continuing its efforts to minimize exposure to loss relating to this line of credit.

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. Our most recent



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model, February 2010, reflects a 9% increase in economic value of equity for a 100 basis point increase in rates. The same model shows a 16% decrease in economic value of equity for a 100 basis
point decrease in rates. Our asset/liability committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate interest rate policy for management to follow in order to
minimize the impact on earnings and economic value of equity in the projected rate environment.

ITEM 4. Controls and Procedures

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



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PART II  OTHER INFORMATION



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

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



| |  |  | increased involvement by the Banks Board of Directors;
| | - |  | -------------------------------------------------------

| |  |  | an assessment of current and future management and staffing needs;
| | - |  | ------------------------------------------------------------------

| |  |  | reductions in adversely classified assets;
| | - |  | ------------------------------------------

| |  |  | improvement in the overall quality and management of the loan portfolio;
| | - |  | ------------------------------------------------------------------------

| |  |  | adequate allowance for loan losses;
| | - |  | -----------------------------------

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

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

| |  |  | prior Supervisory Authority approval to pay cash dividends or Board of Director compensation;
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | the adoption of an annual strategic plan and budget.
| | - |  | ----------------------------------------------------

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

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



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|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: May 14, 2010 |  |                                            |  | BY:                                                            |  | /s/ David H. Gill
|                   |  |                                            |  | David H. Gill, President and CEO
(Principal Executive Officer)
|                   |  |                                            |  |                                                                |  |                  



|                   |  |  |  |                                                                               |  |                          
|------------------ |  |  |  | ----------------------------------------------------------------------------- |  | -------------------------
|                   |  |  | 
|DATE: May 14, 2010 |  |  |  | BY:                                                                           |  | /s/ Charles W. Blair, Jr.
|                   |  |  |  | Charles W. Blair, Jr., EVP & CFO
(Principal Financial and Accounting Officer)



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