##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the Quarterly Period Ended June 30, 2010

OR



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

For the Transition Period from  to

Commission file number 0-49789





Henry County Bancshares, Inc.

(Exact name of registrant as specified in its charter)







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

(770) 474-7293

(Telephone Number)





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

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

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



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

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

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









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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES





INDEX



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



2



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##### Table of Contents

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)



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

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)



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

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(unaudited)



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



See accompanying notes to consolidated financial
statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

Six months ended June 30, 2010 and 2009

(unaudited)



|                                                                           |  |             |         |   |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ----------- | ------- | - | ------- | - | ------------------------- |  | - | ----------------------------------- | - |  | ------------- | ----- | - | ------------------------ | - | ------ | - |  | - | ------- | -
|(in thousands)                                                             |  | CommonStock |         |   | Surplus |   | RetainedEarnings(Deficit) |  |   | AccumulatedOtherComprehensiveIncome |   |  | TreasuryStock |       |   | TotalStockholdersEquity |  
|                                                                           |  |             |         |   |         |  
|Balance, December 31, 2008                                                 |  | $           | 35,972  |   |         | $ | 740                       |  | $ | 24,161                              |   |  | $             | 789   |   |                          | $ | (2,319 | ) |  | $ | 59,343  |  
|Net loss                                                                   |  |             |        |   |         |   |                          |  |   | (18,728                             | ) |  |               |      |   |                          |   |       |   |  |   | (18,728 | )
|Other comprehensive loss                                                   |  |             |        |   |         |   |                          |  |   |                                    |   |  |               | (206  | ) |                          |   |       |   |  |   | (206    | )
|                                                                           |  |             |         |   |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |         |  
|Balance, June 30, 2009                                                     |  | $           | 35,972  |   |         | $ | 740                       |  | $ | 5,433                               |   |  | $             | 583   |   |                          | $ | (2,319 | ) |  | $ | 40,409  |  
|                                                                           |  |             |         |   |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |         |  
|                                                                           |  |             |         |   |         |  
|Balance, December 31, 2009                                                 |  | $           | 35,972  |   |         | $ | 740                       |  | $ | (12,491                             | ) |  | $             | 1,425 |   |                          | $ | (2,319 | ) |  | $ | 23,327  |  
|Net loss                                                                   |  |             |        |   |         |   |                          |  |   | (1,376                              | ) |  |               |      |   |                          |   |       |   |  |   | (1,376  | )
|                                                                           |  |             |         |   |         |  
|Change in par value of common stock from $2.50 per share to $.10 per share |  |             | (34,533 | ) |         |   | 34,533                    |  |   |                                    |   |  |               |      |   |                          |   |       |   |  |   |        |  
|                                                                           |  |             |         |   |         |  
|Other comprehensive loss                                                   |  |             |        |   |         |   |                          |  |   |                                    |   |  |               | (688  | ) |                          |   |       |   |  |   | (688    | )
|                                                                           |  |             |         |   |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |         |  
|Balance, June 30, 2010                                                     |  | $           | 1,439   |   |         | $ | 35,273                    |  | $ | (13,867                             | ) |  | $             | 737   |   |                          | $ | (2,319 | ) |  | $ | 21,263  |  
|                                                                           |  |             |         |   |         |   |                           |  |   |                                     |   |  |               |       |   |                          |   |        |   |  |   |         |  



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30, 2010 and 2009

(unaudited)



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

See accompanying notes to consolidated financial statements.



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30, 2010 and 2009

(unaudited)



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

See accompanying notes to
consolidated financial statements.



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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 and six months ended June 30, 2009 have been reclassified to conform to the current period presentation.

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



|2) | COMMON STOCK
|-- | ------------

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



|3) | RECENT OPERATING LOSSES AND IMPACT ON CAPITAL
|-- | ---------------------------------------------

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|3) | RECENT OPERATING LOSSES AND IMPACT ON CAPITAL, continued
|-- | --------------------------------------------------------



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

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

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



|4) | RECLASSIFICATION
|-- | ----------------

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|4) | RECLASSIFICATION, continued
|-- | ---------------------------



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

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



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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|5) | ACCOUNTING STANDARDS UPDATES
|-- | ----------------------------

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|6) | SECURITIES
|-- | ----------

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

Securities Available for Sale



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

Restricted equity securities are summarized as
follows:



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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|6) | SECURITIES, continued
|-- | ---------------------

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

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



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

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



|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|-------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------------- |  | ------------------- | --- |  | - | ---
|                                       |  | Securities Available forSale |        | Securities Held toMaturity
|(in thousands)                         |  | AmortizedCost                |        | EstimatedFair Value        |   | AmortizedCost |  | EstimatedFair Value
|                                       |  |                              |        |                           
|Due in one year or less                |  | $                            | 17,090 |                            | $ | 17,223        |  | $                   | 270 |  | $ | 274
|Due after one year through five years  |  |                              | 5,493  |                            |   | 5,613         |  |                     | 425 |  |   | 430
|Due after five years through ten years |  |                              | 5,527  |                            |   | 5,505         |  |                     |    |  |   |   
|After ten years                        |  |                              | 1,586  |                            |   | 1,578         |  |                     |    |  |   |   
|Mortgage-backed securities             |  |                              | 25,717 |                            |   | 26,231        |  |                     |    |  |   |   
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    
|                                       |  | $                            | 55,413 |                            | $ | 56,150        |  | $                   | 695 |  | $ | 704
|                                       |  |                              |        |                            |   |               |  |                     |     |  |   |    



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|6) | SECURITIES, continued
|-- | ---------------------



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

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

Securities Available for Sale



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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|6) | SECURITIES, continued
|-- | ---------------------



Securities Held to Maturity



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

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

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



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Notes to Consolidated Financial Statements



|7) | LOANS
|-- | -----

The composition of
loans is summarized as follows:



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

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

Changes in the allowance for loan losses are as follows:



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



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Notes to Consolidated Financial Statements



|7) | LOANS, continued
|-- | ----------------



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

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

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

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



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

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

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



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Notes to Consolidated Financial Statements



|8) | FORECLOSED PROPERTIES
|-- | ---------------------

A
summary of activity in foreclosed properties is as follows:



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

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



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



|9) | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

Loan Commitments

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



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Notes to Consolidated Financial Statements



|9) | COMMITMENTS AND CONTINGENCIES, continued
|-- | ----------------------------------------



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



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

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

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

Contingencies

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



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Notes to Consolidated Financial Statements



|10) | CONCENTRATIONS OF CREDIT RISK
|--- | -----------------------------

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

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

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



|11) | REGULATORY MATTERS
|--- | ------------------

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

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

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

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



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Notes to Consolidated Financial Statements



|11) | REGULATORY MATTERS, continued
|--- | -----------------------------



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

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

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

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



|                           |  |              |   |  |      |   |  |                                       |  
|-------------------------- |  | ------------ | - |  | ---- | - |  | ------------------------------------- | -
|                           |  | Consolidated |   |  | Bank |   |  | Well CapitalizedRegulatoryRequirement |  
|Leverage Capital Ratios    |  | 3.48         | % |  | 3.45 | % |  | 5.00                                  | %
|                           |  |              |  
|Risk Based Capital Ratios: |  |              |   |  |      |   |  |                                       |  
|Tier 1                     |  | 4.19         | % |  | 4.16 | % |  | 6.00                                  | %
|Total                      |  | 5.45         | % |  | 5.41 | % |  | 10.00                                 | %



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Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES
|--- | ------------------------------------

Determination of Fair Value

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

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

Fair Value Hierarchy

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

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



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Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

Level 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.

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

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

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

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

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



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Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

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

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

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

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



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Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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



|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|----------------------------- |  | --------------------------------------------------------- | ----- | ----------------------------------------- | - | --------------------------------------- |  | ------------------ | - |  | - | ------
|                              |  | Fair Value Measurements at June 30, 2010 Using           
|(in thousands)                |  | Quoted Pricesin
ActiveMarkets forIdenticalAssets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | TotalCarryingValue
|                              |  |                                                           |       |                                          
|Assets                        |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|Securities available for sale |  | $                                                         | 6,183 |                                           | $ | 49,967                                  |  | $                  |  |  | $ | 56,150
|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|Total assets at fair value    |  | $                                                         | 6,183 |                                           | $ | 49,967                                  |  | $                  |  |  | $ | 56,150
|                              |  |                                                           |       |                                           |   |                                         |  |                    |   |  |   |       
|                              | 
|                              |  | Fair Value Measurements at December 31, 2009 Using       
|(in thousands)                |  | Quoted 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



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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



|                  |  |                                                                           |   |                                           |   |                                         |  |              |       |  |   |      
|----------------- |  | ------------------------------------------------------------------------- | - | ----------------------------------------- | - | --------------------------------------- |  | ------------ | ----- |  | - | -----
|                  |  | For the Six Months Ended June 30,
20102010 Fair Value Changes Based On:  
|(in thousands)    |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1)                 |   | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | Total Losses
|                  |  |                                                                           |   |                                          
|Impaired loans    |  | $                                                                         |  |                                           | $ | 1,023                                   |  | $            | 1,015 |  | $ | 2,038
|Foreclosed assets |  |                                                                           |  |                                           |   | 422                                     |  |              | 2,617 |  |   | 3,039
|                  |  |                                                                           |   |                                           |   |                                         |  |              |       |  |   |      
|Total             |  | $                                                                         |  |                                           | $ | 1,445                                   |  | $            | 3,632 |  | $ | 5,077
|                  |  |                                                                           |   |                                           |   |                                         |  |              |       |  |   |      
|                  | 
|                  |  | For the Three Months Ended June 30,
20102010 Fair Value Changes Based On:
|(in thousands)    |  | Quoted Pricesin ActiveMarkets
forIdenticalAssets(Level 1)                 |   | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | Total Losses
|                  |  |                                                                           |   |                                          
|Impaired loans    |  | $                                                                         |  |                                           | $ | 898                                     |  | $            | 860   |  | $ | 1,758
|Foreclosed assets |  |                                                                           |  |                                           |   | 413                                     |  |              | 2,473 |  |   | 2,886
|                  |  |                                                                           |   |                                           |   |                                         |  |              |       |  |   |      
|Total             |  | $                                                                         |  |                                           | $ | 1,311                                   |  | $            | 3,333 |  | $ | 4,644
|                  |  |                                                                           |   |                                           |   |                                         |  |              |       |  |   |      



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------



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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



|12) | FAIR VALUE OF ASSETS AND LIABILITIES, continued
|--- | -----------------------------------------------

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



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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



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

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

Cautionary Notice Regarding Forward-Looking Statements

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

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



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



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



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



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



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



| |  |  | increased carrying costs and the probability of additional impairment charges associated with our foreclosed properties
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | extended holding periods that may be required before we can liquidate our foreclosed properties
| | - |  | -----------------------------------------------------------------------------------------------



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



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



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



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



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



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



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



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



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



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

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

Overview

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

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

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

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



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

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

Critical Accounting Policies

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



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Results of Operations

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

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



Table 1-Financial Highlights

Selected Financial Information



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



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

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



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

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



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

For the three months ended June 30, 2010 and 2009



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



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

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

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

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

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



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES



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

For the six months ended June 30, 2010 and 2009



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



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

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

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

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

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



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Table 4- Changes in Interest Income and Interest Expense



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

Provision for (Recovery of) Loan Losses

Our provision for loan losses amounted to $2.2 million for the three months ended June 30, 2010, compared to a provision of $12.3
million for the same period in 2009. For the six month period ended June 30, 2010, we reduced our allowance for loan losses through a negative provision of $696,000. The negative provision results from a recovery of $3.3 million relating to a
positive fair value adjustment upon foreclosure of certain collateral. For the first six months of 2009, we added $14.0 million to our allowance for loan losses through the provision. The allowance for loan losses as a percentage of total loans was
2.80% at June 30, 2010 as compared to 3.06% at December 31, 2009. The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately cover all known and inherent risks in the loan portfolio. Our
evaluation of the loan portfolio includes a continuing review of loan loss experience, current economic conditions which may affect the borrowers ability to repay and the underlying collateral value.



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Other Operating Income

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

Other Expenses

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

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



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Income Taxes

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

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

Balance Sheet Review

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

Loans

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

Table 5- Loans Outstanding



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



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

Asset Quality and Risk Elements

We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies
designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these
policies and procedures. Additional information on the credit administration function is included in Item 1 under the headings Lending 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 six months ended June 30, 2010 and 2009.

Table 6- Allowance for Loan Losses



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



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

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

Nonperforming Assets

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



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Table 7- Nonperforming Assets



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

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

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



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The following table summarizes nonperforming assets by category.

Table 8- Nonperforming Assets (NPAs) by Category

(dollars in thousands)



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

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

Table 9-Composition of Foreclosed Properties

As of June 30, 2010



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



|* | Percent of total foreclosed properties
|- | --------------------------------------



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

Investment Securities

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

Deposits

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

Other
Funding Sources

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



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Liquidity

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

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

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

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



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Capital Resources

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



|                           |  |              |   |  |      |   |  |                                       |  
|-------------------------- |  | ------------ | - |  | ---- | - |  | ------------------------------------- | -
|                           |  | Consolidated |   |  | Bank |   |  | Well CapitalizedRegulatoryRequirement |  
|                           |  |              |  
|Leverage Capital Ratios    |  | 3.48         | % |  | 3.45 | % |  | 5.00                                  | %
|                           |  |              |  
|Risk Based Capital Ratios: |  |              |   |  |      |   |  |                                       |  
|Tier 1                     |  | 4.19         | % |  | 4.16 | % |  | 6.00                                  | %
|Total                      |  | 5.45         | % |  | 5.41 | % |  | 10.00                                 | %

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

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



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|ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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

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

We use a third party simulation model to monitor changes in net interest income due to changes in market rates. The model of rising,
falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as economic value of equity over a
twelve-month period is subjected up to a 400 basis point increase and decrease in rates. Our June 30, 2010 model reflects a 16.4% increase in economic value of equity for a 100 basis point increase in rates. The same model shows a 20.1%
decrease in economic value of equity for a 100 basis point decrease in rates. Our asset/liability committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate
interest rate policy for management to follow in order to minimize the impact on earnings and economic value of equity in the projected rate environment.



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

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



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IIOTHER INFORMATION



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

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



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



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



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



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



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



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



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



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



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

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

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

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



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



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