<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                      
                            Washington, D.C.  20549

                             ---------------------
                                   FORM 10-Q
              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarter ended:  June 30, 1997      Commission file number:  33-42286

 
                      HENDERSON CITIZENS BANCSHARES, INC.
            (Exact name of registrant as specified in its charter)


          TEXAS                      6712                  75-2371232
 ------------------------  -----------------------  ------------------------  
     (State or other          (Primary Standard         (I.R.S. Employer
     jurisdiction of              Industrial           Identification No.)
     incorporation or        Classification Code
      organization)                 Number)
  

                      201 WEST MAIN STREET, P.O. BOX 1009
                            HENDERSON, TEXAS  75653
                                (903) 657-8521
         (Address, including ZIP code, and telephone number, including
            area code, of registrant's principal executive offices)

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

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

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.

                               X  Yes          No
                              ---          ---
                                        

At June 30, 1997,  2,116,080  shares of Common Stock, $5.00 par value, were
outstanding.

                                       1
<PAGE>
 
Part I.  FINANCIAL INFORMATION
Item 1. Financial Statements

             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets
                                  (unaudited)
                      June 30, 1997 and December 31, 1996
                            (dollars in thousands)
<TABLE>
<CAPTION>
                 Assets                         1997      1996
                 ------                     --------  --------
 
<S>                                         <C>       <C>
Cash and due from banks                     $  8,028    12,413
 
Interest-bearing deposits with
     other financial institutions              6,000     3,892
 
Federal funds sold                               600     1,150
 
Securities:
   Held-to-maturity, approximate market
     value of $75,748 in 1997 and 
     $82,465 in 1996                          75,802    82,415
   Available-for-sale                        144,467   145,740
                                            --------  --------
                                             220,269   228,155
 
Loans, net                                   102,146   100,825
 
Premises and equipment, net                    4,801     3,751
 
Accrued interest receivable                    3,403     3,449
 
Other assets                                   3,933     3,195
                                            --------  --------
                                            $349,180   356,830
                                            ========  ========
     Liabilities and Stockholders' Equity
     ------------------------------------
 
Deposits:
   Demand - non interest-bearing              32,501    31,785
   Interest-bearing transaction accounts      71,370    74,984
   Money market and savings                   44,091    45,484
   Certificates of deposit and other    
     time deposits                           165,061   168,420
                                            --------  --------
        Total deposits                       313,023   320,673
                                            --------  --------
 
Accrued interest payable                       1,586     1,144
Notes payable                                    844     1,511
Other liabilities                              1,140     1,514
                                            --------  --------
                                             316,593   324,842
Stockholders' equity:
   Preferred stock, $5 par value;
     2,000,000 shares authorized
     none issued or outstanding                   --        --
   Common stock, $5 par value;
     10,000,000 shares authorized,
     2,160,000 issued                         10,800    10,800
   Surplus                                     5,400     5,400
   Retained earnings                          17,717    16,825
   Net unrealized  losses on securities
     available for sale, net of income taxes    (824)     (703)
                                            --------  --------
                                              33,093    32,322
   Less treasury stock, 43,920 shares in
     1997 and 29,700 shares in 1996, at 
     cost                                       (506)     (334)
                                            --------  --------
        Total stockholders' equity            32,587    31,988
Commitments and contingencies
                                            --------  --------
                                            $349,180   356,830
                                            ========  ========
</TABLE> 

See accompanying notes to consolidated financial statements.
 

                                       2
<PAGE>
 
             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
                       Consolidated Statements of Income
                                  (unaudited)
               (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   Three months               Six months
                                                   ended June 30             ended June 30
                                              -----------------------   -----------------------
 
                                                 1997         1996         1997         1996
                                              ----------   ----------   ----------   ----------
<S>                                           <C>          <C>          <C>          <C>
Interest income:
   Loans                                      $    2,129        1,756        4,224        3,400
   Securities                                                           
        Taxable - available-for-sale               2,336        2,775        4,530        5,585
        Taxable - held-to-maturity                   592                     1,326   
        Tax-exempt                                   462          389          899          780
   Federal funds sold                                 33           17           86           71
   Interest-bearing deposits with other  
    financial institutions                            53           49          158          167 
                                              ----------   ----------   ----------   ----------
          Total interest income                    5,605        4,986       11,223       10,003
                                              ----------   ----------   ----------   ----------
                                                                                     
Interest expense:                                                                    
   Deposits:                                                                         
        Transaction accounts                         473          476          990        1,007
        Money market and savings                     317          316          639          646
        Certificates of deposit and       
         other time deposits                       2,112        1,899        4,192        3,845
   Other                                              13           --           26           --
                                              ----------   ----------   ----------   ----------
          Total interest expense                   2,915        2,691        5,847        5,498
                                              ----------   ----------   ----------   ----------
                                                                                     
          Net interest income                      2,690        2,295        5,376        4,505
                                                                                     
Provision for loan losses                             83           70          170          120
                                              ----------   ----------   ----------   ----------
          Net interest income after      
           provision for loan losses               2,607        2,225        5,206        4,385
                                              ----------   ----------   ----------   ----------
                                                                                     
Other income:                                                                        
        Gains (losses) on securities         
         transactions, net                           (26)         123          (64)         763
        Income from fiduciary activities             150          154          288          318
        Service charges, commissions,              
         and fees                                    449          331          892          649
        Other                                         83           92          158          191
                                              ----------   ----------   ----------   ----------
          Total other income                         656          700        1,274        1,921
                                              ----------   ----------   ----------   ----------
                                                                                     
Other expenses:                                                                      
        Salaries and employee benefits             1,404        1,182        2,666        2,245
        Occupancy and equipment                      253          212          486          418
        Regulatory assessments                        34           46           60           86
        Other                                        632          504        1,235          994
                                              ----------   ----------   ----------   ----------
          Total other expenses                     2,323        1,944        4,447        3,743
                                              ----------   ----------   ----------   ----------
                                                                                     
          Income before income taxes                 940          981        2,033        2,563
                                                                                     
Income tax expense                                   204          230          462          658
                                              ----------   ----------   ----------   ----------
            Net income                         $     736          751        1,571        1,905
                                              ==========   ==========   ==========   ==========
                                                                                     
            Net income per common share        $     .35          .35          .74          .88
                                              ==========   ==========   ==========   ==========
                                                                                     
            Average number of shares     
              outstanding                      2,121,640    2,160,000    2,125,946    2,160,000
                                              ==========   ==========   ==========   ==========
</TABLE> 
 
See accompanying notes to consolidated financial statements.
 

                                       3
<PAGE>
 
             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity
                                  (unaudited)

                   Six months ended  June 30, 1997 and 1996
               (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                Net Unrealized
                                                                                   Losses on
                                                                                  Securities                    Total
                                         Preferred  Common           Retained      Available     Treasury   Stockholder's
                                           Stock    Stock   Surplus  Earnings      for Sale        Stock        Equity
                                         ---------  ------  -------  --------   --------------   --------   -------------
<S>                                      <C>        <C>     <C>      <C>        <C>              <C>        <C>

Balances at December 31, 1995            $      --  10,800    5,400    14,859              147         --          31,206
 
     Net income                                 --      --       --     1,905               --         --           1,905
 
     Net change in unrealized losses
     on securities available for sale           --      --       --        --           (1,401)        --          (1,401)
 
     Cash dividends ($.32 per share)            --      --       --      (691)              --         --            (691)
                                         ---------  ------  -------  --------   --------------   --------   -------------
 
Balances at June 30, 1996                $      --  10,800    5,400    16,073           (1,254)        --          31,019
                                         =========  ======  =======  ========   ==============   ========   =============
 
 
Balances at December 31, 1996            $      --  10,800    5,400    16,825             (703)      (334)         31,988
 
     Net income                                 --      --       --     1,571               --         --           1,571
 
     Net change in unrealized losses
     on securities available for sale           --      --       --        --             (121)        --            (121)
 
     Cash dividends ($.32 per share)            --      --       --      (679)              --         --            (679)
 
     Purchase of 14,220 shares
     of treasury stock                          --      --       --        --               --       (172)           (172)
                                         ---------  ------  -------  --------   --------------   --------   -------------
 
Balances at June 30, 1997                $      --  10,800    5,400    17,717             (824)      (506)         32,587
                                         =========  ======  =======  ========   ==============   ========   =============
</TABLE> 

See accompanying notes to consolidated financial statements.
 

                                       4
<PAGE>
 
              HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                     Consolidated Statement of Cash Flows
                                  (unaudited)

                    Six months ended June 30, 1997 and 1996
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                1997      1996
                                             -------   -------
<S>                                          <C>       <C>
Operating activities:
     Net income                              $ 1,571     1,905
     Adjustments to reconcile net income 
       to net cash provided by operating
       activities:
          Net amortization of securities         190       334
          Net (gains) losses on    
            securities transactions               64      (763)
          Provision for loan losses              170       120
          Depreciation and amortization          296       225
          Decrease in accrued interest            
            receivable                            46       681 
          Increase in other assets              (775)       (8)
          Increase (decrease) in accrued
            interest payable                     442       (62)
          Decrease in other liabilities         (374)     (179)
                                             -------   -------
              Net cash provided by operating   
                activities                     1,630     2,253
                                             -------   -------
 
Investing activities:
     Proceeds from maturities and paydowns 
       of held-to-maturity securities         11,568     4,469
     Purchases of held-to-maturity      
       securities                             (5,130)   (4,787)
     Proceeds from sales of        
       available-for-sale securities          14,958    40,662
     Proceeds from maturities and       
       paydowns of available-for-sale
       securities                              5,757    16,848
     Purchases of available-for-sale    
       securities                            (19,705)  (44,521)
     Net (increase) in loans                  (1,490)   (6,560)
     Purchases of bank premises and     
       equipment                              (1,247)     (239)
                                             -------   -------
              Net cash provided by (used
                in) investing activities       4,711     5,872
                                             -------   -------
  
Financing activities:
     Net decrease in deposits                 (7,650)   (6,725)
     Payment on notes payable                   (667)       --
     Cash dividends paid                        (679)     (691)
     Purchase of treasury stock                 (172)       --
                                             -------   -------
              Net cash used in financing
                activities                    (9,168)   (7,416)
                                             -------   -------
 
              Increase (decrease) in cash 
              and cash equivalents            (2,827)      709
Cash and cash equivalents at beginning  
  of period                                   17,455    11,558
                                             -------   -------
 
Cash and cash equivalents at end of period   $14,628    12,267
                                             =======   =======
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  ACTIVITIES
Income taxes paid, net of refunds            $   590       555
                                             =======   =======
 
Interest paid                                $ 5,405     5,560
                                             =======   =======
</TABLE> 

 
See accompanying notes to consolidated financial statements.
 

                                       5
<PAGE>
 
             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                                 June 30, 1997

(1)  BASIS OF PRESENTATION
     ---------------------
 
     The accompanying consolidated financial statements are unaudited, but
        include all adjustments, consisting of normal recurring accruals, which
        management considers necessary for a fair presentation of the financial
        position, results of operations, and cash flows.

     Certain information and footnote disclosures normally included in financial
        statements prepared in accordance with generally accepted accounting
        principles have been condensed or omitted pursuant to Securities and
        Exchange Commission rules and regulations. The consolidated financial
        statements and footnotes included herein should be read in conjunction
        with the Company's annual consolidated financial statements as of
        December 31, 1996 and 1995, and for each of the years in the three year
        period ended December 31, 1996 included in the Company's Form 10-K.

(2)  SECURITIES
     ----------

     The amortized cost (carrying value) and approximate market values of
        securities held-to-maturity at June 30, 1997, are summarized as follows
        (in thousands of dollars):

<TABLE>
<CAPTION>
 
                                                 Gross        Gross
                                  Amortized   Unrealized    Unrealized     Fair
                                     Cost        Gains        Losses      Value
                                  ---------   ----------    ----------   -------
 
<S>                               <C>         <C>           <C>          <C>
U.S. Treasury                     $   7,050           49          (65)     7,034
 
U.S. Government agencies             10,179           40          (45)    10,174
State and municipal                  33,552          285         (108)    33,729
Mortgage-backed securities
  and collateralized
  mortgage obligations               24,021           15         (227)    23,809
Other securities                      1,000            2           --      1,002
                                  ---------   ----------    ----------   -------
 
                                  $  75,802          391         (445)    75,748
                                  =========   ==========    ==========   =======
</TABLE> 
 
     The amortized cost and approximate market values (carrying value) of
        securities available-for-sale at June 30, 1997, are summarized as
        follows (in thousands of dollars):
 
<TABLE> 
<CAPTION> 
                                                 Gross        Gross
                                  Amortized   Unrealized    Unrealized     Fair
                                     Cost        Gains        Losses      Value
                                  ---------   ----------    ----------   -------
 
<S>                               <C>         <C>           <C>          <C>
U.S. Treasury                     $  51,957          184         (109)    52,032
 
U.S. Government agencies             22,237           28          (92)    22,173
Other securities                        368           --           --        368
Mortgage-backed securities
  and collateralized
  mortgage obligations               71,154          446       (1,705)    69,895
                                  ---------   ----------    ----------   -------
 
                                  $ 145,716          658       (1,906)   144,468
                                  =========   ==========    ==========   =======
</TABLE> 

                                       6
<PAGE>
 
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                                 June 30, 1997

(3)  LOANS AND ALLOWANCE FOR LOAN LOSSES
     -----------------------------------

     The composition of the Company's loan portfolio is as follows (in thousands
        of dollars):

<TABLE>
<CAPTION>
                                          June 30,      December 31,
                                            1997            1996
                                         ---------      -----------
<S>                                     <C>             <C>
        Commercial and industrial        $  25,225          23,863
        Real estate mortgage                48,545          46,211
        Installment and other               30,569          33,111
                                         ---------      ----------
                Total                      104,339         103,185
 
        Less:
          Allowance for loan losses         (1,196)         (1,146)
          Unearned discount                   (998)         (1,214)
                                         ---------      ----------
 
                Loans, net               $ 102,145         100,825
                                         =========      ==========
</TABLE> 
 
 
     Changes in the allowance for loan losses for the six months ended June 30,
        1997 and 1996 are summarized as follows (in thousands of dollars):
 
<TABLE> 
<CAPTION> 
                                            1997            1996
                                         ---------      ----------
<S>                                      <C>             <C>
        Balance, January 1               $   1,146           1,019
          Provision charged to
            operating expense                  170             120
          Loans charged off                   (176)            (57)
          Recoveries on loans                   56              39
                                         ---------      ----------
 
        Balance, June 30                 $   1,196           1,121
                                         =========      ==========
</TABLE>

                                       7
<PAGE>
 
Item 2.

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
       AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC.
                FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996


The following discussion and analysis of the financial condition and results of
operations of the Company and its primary bank subsidiaries, Citizens National
Bank and First State Bank, should be read in conjunction with the financial
statements and the notes thereto, and other financial and statistical
information appearing elsewhere in this report.


RESULTS OF OPERATIONS
---------------------

Net income for the first six months of 1997 was $1,571,000 compared to
$1,905,000 for the same period in 1996 primarily caused by changes in gains and
losses on securities transactions. The decline in net income was offset by the
acquisition of Waskom Bancshares, Inc., and its majority owned subsidiary, First
State Bank, Waskom in late 1996 and the establishment of a trust office in
Corsicana  in March, 1997 (see "Acquisitions" below).  During the first six
months of 1997, net interest income increased due to increased loan demand and
improved spreads and margins. The Company made a provision of $170,000 to the
allowance for loan losses during the first six months of 1997.  A provision of
$120,000 was made for loan losses during the same period in 1996. The Company
experienced losses on securities transactions totaling approximately $64,000 in
the first six months of 1997 compared to gains of $763,000 in the first six
months of 1996.  Other income, excluding gains on securities transactions, for
the first six months of 1997 was $1,338,000 compared to $1,158,000 for the same
period in 1996 due to increased volumes. Total other expenses for the first six
months of 1997 were $4,447,000 compared to $3,743,000 for the same period in
1996.  Income tax expense for the first six months of 1997 and 1996 was $462,000
and $658,000, respectively.


ACQUISITION
-----------

On August 31, 1996, the Company acquired substantially all of the outstanding
shares of Waskom Bancshares, Inc. and its majority owned subsidiary, First State
Bank, Waskom, Texas. Pursuant to the purchase agreement, the Company paid
$3,463,000, $1,511,000 of which was paid as a note payable due upon demand
having an interest rate of 6.10%. The remaining balance on the note payable as
of June 30, 1997 is $844,000.  This transaction resulted in approximately
$1,337,000 in goodwill, which is being amortized over fifteen years on a
straight line basis. The transaction was accounted for using the purchase method
of accounting. This acquisition resulted in an increase in total assets of
$24,075,000 and total deposits of $21,714,000.

On March 24, 1997, the Company expanded its trust operations by establishing a
trust department in Corsicana, Texas.  Three new employees were hired as a
result of this transaction.


NET INTEREST INCOME
-------------------

For the six months ended June 30, 1997, net interest income was $5,376,000
compared to $4,505,000 for the first six months of 1996.  Approximately $468,000
of the increase in net interest income is due to the Waskom acquisition. The
remainder of the increase is the result of  an increase in loan volumes and
improved net interest margins and spreads.

Net interest income for the three month period ended June 30, 1997 was
$2,690,000 compared to $2,295,000 in 1996. Approximately $240,000 of the
increase in 1997 is a result of the Waskom acquisition.  The remainder of the
increase is the result of improved loan demand and improved net interest margins
and spreads.


PROVISION FOR LOAN LOSSES
-------------------------

During the first six months of 1997, the Company increased its allowance for
loan losses through a provision of $170,000. The Company increased its allowance
for loan losses during the same period of 1996 by $120,000. The Company
experienced net charge offs of $120,000 in the first six months of 1997 compared
to net charge offs of $18,000 in the same period in 1996.

                                       8
<PAGE>
 
For the three month period ended June 30, 1997, the Company increased its
allowance through a provision of $83,000.  The Company increased its allowance
for loan losses during the same period in 1996 by $70,000.

See additional information related to the Company's loan operations in the
Allowance for Loan Loss section below.


OTHER INCOME AND EXPENSES
-------------------------

Non-interest income, excluding securities losses was $1,338,000 for the first
six months of 1997 as compared to $1,158,000 in the first six months of 1996.
This increase is due to increases in service charges and volumes.  Approximately
$106,000 is related to the Waskom acquisition.  The Company experienced losses
on securities transactions for the first six months of 1997 of $64,000 which
compares to gains on securities transactions for the first six months of 1996 of
$763,000.  The gain in 1996 was the result of the sale of certain taxable
securities consistent with the Company's portfolio management policy. Other
expenses for the six month period ended June 30, 1997 were $4,447,000 compared
to $3,743,000 during the same period in 1996. The increase is due primarily to
general salary and benefit increases.  Approximately $423,000 of the increase in
other expenses is related to the Waskom acquisition, and approximately $58,000
is related to the establishment of the trust office in Corsicana.

For the three months ended June 30, 1997, non-interest income, excluding
securities losses was $682,000 compared to $577,000 for the same period in 1996
due primarily from increases in service charges.  The Company experienced losses
on securities transactions in the three months ended June 30, 1997 of
approximately $26,000 compared to gains on securities transactions of $123,000
for the three months ended June 30, 1996.


INCOME TAXES
------------

Income tax expense for the first six months of 1997 was $462,000, compared to
$658,000 in the same period in 1996. The effective tax rate for the first six
months of 1997 and 1996, respectively, was 22.7% and 25.7%.  In 1996, the higher
effective rate was due to the large gain on securities transactions and its
effect on tax-exempt income as a percent of income. The effective tax rate
decreased in 1997 due to the effect of  increased tax exempt income from
municipal securities.

Income tax expense for the three months ended June 30, 1997 and June 30, 1996
were $204,000 and $230,000, respectively.


FINANCIAL CONDITION
-------------------

The Company's total assets at June 30, 1997 of $349,180,000 decreased from the
total assets at December 31, 1996 of $356,830,000.  Total deposits were
$313,023,000 at June 30, 1997, compared to the December 31, 1996 total  of
$320,673,000.

Equity capital of the Company, excluding unrealized gains or losses on
securities available for sale, as a percentage of total assets was 9.6% at June
30, 1997 compared to 9.2% at December 31, 1996.  The risk-based Tier I and Tier
II capital ratios and the leverage ratio of Citizens National Bank amounted to
24.3%,  25.2% , and 9.2%, respectively at June 30, 1997 compared to 23.5%,
24.4%, and 9.0%, respectively, at December 31, 1996.  At June 30, 1997,  First
State Bank had Tier I and Tier II capital ratios and a leverage ratio of  27.1%,
27.5%, AND 9.1%, RESPECTIVELY, COMPARED TO 25.3%, 25.5%, AND 8.9%, RESPECTIVELY
AT DECEMBER 31, 1996.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

At June 30 1997, cash and cash equivalents for the Company of $14,628,000
decreased from the December 31, 1996 amount of $17,455,000.  The Company's
stockholders' equity of $32,587,000 remains at a level considered to be adequate
by management.  Profits in excess of dividends paid to shareholders is reflected
in the increase in undivided profits  from 1996.

                                       9
<PAGE>
 
ALLOWANCE FOR LOAN LOSSES
-------------------------

The allowance for loan losses at June 30, 1997 and December 31,1996 was 1.15%
and 1.11%  of outstanding loans, respectively. By its nature, the process
through which management determines the appropriate level of the allowance
requires considerable judgment.  The determination of the necessary allowance,
and correspondingly the provision for loan losses, involves assumptions about
projections of national and local economic conditions, the composition of the
loan portfolio, and prior loss experience, in addition to  other considerations
As a result, no assurance can be given that future losses will not vary from the
current estimates.  However, management believes that the allowance at June 30,
1997 is adequate to cover losses inherent in its loan portfolio.  A migration
analysis and an internal classification system for loans also helps identify
potential problems, if any, that are not identified otherwise.  From these
analyses, management determines which loans are potential candidates for
nonaccrual status, including impaired loan status, or charge-off.  Management
continually reviews loans and classifies them consistent with the Comptroller's
guidelines to help ensure that an adequate allowance is maintained.

The allocation of the allowance for loan losses is based upon the inherent risks
in the various components of the loan portfolio.  Amounts allocated to each
component are determined based on management's evaluations of concentrations of
credit risks, current and anticipated economic conditions, historical analyses,
and classification and estimated loss exposure assigned to specific credits.
These reserve allocations are subject to change as various economic conditions
dictate.  The following table is an analysis of the Allowance for Loan Losses.


                   ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                             For the Six Months Ended
                                                     June 30,
                                              1997              1996
                                             ------            ------
<S>                                          <C>               <C>

Balance at beginning of period               $1,146             1,019
Charge-offs:
   Commercial, financial, and agricultural       57                10
   Real estate-mortgage                           1                --
   Installment loans to individuals             118                47
                                             ------            ------
                                                176                57
Recoveries:
   Commercial, financial, and agricultural       32                20
   Installment loans to individuals              24                19
                                             ------            ------
                                                 56                39
                                             ------            ------
 
Net charge-offs                                 120                18
                                             ------            ------
Additions charged to operations                 170               120
                                             ------            ------
Balance at end of period                     $1,196             1,121
                                             ======            ======
Ratio of net charge-offs during the period 
   to average loans outstanding during the 
   period                                       .10%              .01%
                                             ======            ======
</TABLE>

NON ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
--------------------------------------------

The Company's policy is to discontinue the accrual of interest income on loans
whenever it is determined that reasonable doubt exists with respect to timely
collectibility of interest and principal.  Loans are placed on nonaccrual status
if either material deterioration occurs in the financial position of the
borrower, payment in full of interest or principal is not anticipated, payment
in full of interest or principal is past due 90 days or more unless well
secured, payment in full of interest or principal on a loan is past due 180 days
or more, regardless of collateral, or the loan in whole or in part is classified
as doubtful. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well-secured. When a loan is placed on
nonaccrual status, interest is no longer accrued or included in interest income
and previously accrued income is reversed.

                                       10
<PAGE>
 
As of  June 30, 1997 and 1996, the Company had $92,000 in nonaccrual loans.  The
total of accruing loans which are contractually past due 90 days or more as to
principal or interest at June 30, 1997 is $18,000 compared to $67,000 as of June
30, 1996.  Other real estate totaled $175,000 at June 30, 1997.  At June 30,
1996, the Company did not have any other real estate.

The following is a summary of the Company's problem loans as of June 30, 1997
and 1996.

<TABLE>
<CAPTION>
 
 
                                               At June 30,
                                         1997              1996
                                         ----              ----
                                         (dollars in thousands)

<S>                                      <C>               <C> 
Nonaccrual loans                         $ 92                92
Restructured loans                         --                --
Other impaired loans                       --                --
Other real estate                         175                --
                                         ----              ----
         Total nonperforming loans        267                92
                                         ====              ====
                                                          
Loans past due 90+ days and still          18                67
 accruing                                                 
                                         ====              ====
                                                          
Other potential problem loans              --                --
                                         ====              ====
                                                          
Income that would have been recorded in                   
         accordance with original terms     5                 2
Less income actually recorded              --                --
                                         ----              ----
Loss of income                           $  5                 2
                                         ====              ====
</TABLE>


CONCENTRATION OF CREDIT RISK
----------------------------

The Company grants real estate, commercial, and industrial loans to customers
primarily in Henderson, Texas, and surrounding areas of east Texas. Although the
Company has a diversified loan portfolio, a substantial portion (approximately
46.5% at June 30, 1997) of its loans are secured by real estate and its ability
to fully collect its loans is dependent upon the real estate market in this
region. The Company typically requires collateral sufficient in value to cover
the principal amount of the loan. Such collateral is evidenced by mortgages on
property held and readily accessible to the Company. See additional information
related to the composition of the Company's loan portfolio included in note 3 to
the consolidated financial statements.


CORPORATE OBJECTIVES
--------------------

It is the philosophy of the Company to continue to remain independent in
ownership, to foster its image as the community leader in banking, to increase
its market share through selected acquisitions and aggressive marketing, to
maintain a sound earning-asset portfolio, and to assess liquidity needs while
maximizing its profitability and return to its shareholders.

                                       11
<PAGE>
 
Part II - OTHER INFORMATION

Item 1. Legal Proceedings

   None.


Item 2. Changes in Securities.

   None


Item 3. Defaults Upon Senior Securities.

   None


Item 4. Submission of Matters to a Vote of Security Holders.

   None

 
Item 5. Other Information.

   None

Item 6. Exhibits and Reports on Form 8-K.

   None

                                       12
<PAGE>
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                 HENDERSON CITIZENS BANCSHARES, INC.


Date:     8-11-97                By: /s/ MILTON S. McGEE, JR.
      ----------------------         -------------------------------------------
                                      Milton S. McGee, Jr., CPA
                                      President



Date:     8-11-97                By: /s/ REBECCA G. TANNER
      ----------------------         -------------------------------------------
                                      Rebecca G. Tanner, CPA
                                      Chief Accounting Officer

                                       13