<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 quarterly period ended: June 30, 1999  Commission file number:  33-42286

                      HENDERSON CITIZENS BANCSHARES, INC.
            (Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
              Texas                                    6712                          75-2371232
-------------------------------------       ----------------------------     ------------------------
<S>                                        <C>                               <C>
(State or other jurisdiction               (Primary Standard Industrial            (IRS Employer
 of incorporation or organization)          Classification Code Number)          Identification No.)
</TABLE>

                      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, 1999, 2,015,674 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)
                  (dollars in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                              June 30,            December 31,
                              Assets                                            1999                  1998
                              -------                                        --------            -------------
<S>                                                                        <C>                   <C>
Cash and due from banks                                                  $          9,051                 9,493
Interest-bearing deposits with
     other financial institutions                                                   5,520                17,174
Federal funds sold                                                                  2,040                10,230
Securities:
   Held-to-maturity, approximate market value of $68,911
     in 1999 and $75,904 in 1998                                                   69,735                74,537
   Available-for-sale                                                             142,731               130,886
                                                                         ----------------      ----------------
                                                                                  212,466               205,423
Loans, net                                                                        137,550               129,263
Premises and equipment, net                                                         6,392                 6,202
Accrued interest receivable                                                         3,880                 3,706
                                                                                                 `
Other assets                                                                        7,729                 5,428
                                                                         ----------------      ----------------
                                                                         $        384,628               386,919
                                                                         ================      ================
      Liabilities and Stockholders' Equity
      ------------------------------------
Deposits:
   Demand - non interest-bearing                                                   42,015                42,960
   Interest-bearing transaction accounts                                           82,524                85,029
   Money market and savings                                                        45,083                47,324
   Certificates of deposit and other time deposits                                178,238               170,407
                                                                         ----------------      ----------------
                      Total deposits                                              347,860               345,720
                                                                         ----------------      ----------------
Accrued interest payable                                                            1,253                 1,325
Notes payable                                                                           0                 2,282
Other liabilities                                                                     568                 1,681
                                                                         ----------------      ----------------
                                                                                  349,681               351,008
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                                                               22,415                21,089
   Accumulated other comprehensive income                                          (1,630)                  649
                                                                         ----------------      ----------------
                                                                                   36,985                37,938
  Less treasury stock, 144,326 shares in 1999
        and 143,626 shares in 1998, at cost                                        (2,038)               (2,027)
                                                                         ----------------      ----------------
                        Total stockholders' equity                                 34,947                35,911
Commitments and contingencies
                                                                         ----------------      ----------------
                                                                         $        384,628               386,919
                                                                         ================      ================
</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,
                                                                     1999              1998              1999              1998
                                                                -------------     -------------     -------------     -------------
<S>                                                            <C>                <C>               <C>               <C>
Interest income:
   Loans                                                        $       2,759             2,382             5,389             4,658
   Securities
        Taxable - available-for-sale                                    2,075             2,129             4,074             4,327
        Taxable - held-to-maturity                                        309               463               686               998
        Tax-exempt                                                        575               387             1,122               743
   Federal funds sold                                                      20               111               105               191
   Interest-bearing deposits with other financial institutions             86               113               215               311
                                                                -------------     -------------     -------------     -------------
          Total interest income                                         5,824             5,585            11,591            11,228
                                                                -------------     -------------     -------------     -------------

Interest expense:
   Deposits:
        Transaction accounts                                              432               474               899               965
        Money market and savings                                          258               320               528               642
        Certificates of deposit and other time deposits                 2,168             2,084             4,286             4,190
   Other                                                                    2                 8                11                15
                                                                -------------     -------------     -------------     -------------
          Total interest expense                                        2,860             2,886             5,724             5,812
                                                                -------------     -------------     -------------     -------------

          Net interest income                                           2,964             2,699             5,867             5,416

Provision for loan losses                                                 150               164               300               293
                                                                -------------     -------------     -------------     -------------
          Net interest income after provision for loan losses           2,814             2,535             5,567             5,123
                                                                -------------     -------------     -------------     -------------

Other income:
        Service charges, commissions, and fees                            909               796             1,731             1,407
        Income from fiduciary activities                                  259               200               506               405
        Gains on securities transactions, net                              --                40               187                66
        Other                                                             103               139               195               287
                                                                -------------     -------------     -------------     -------------
          Total other income                                            1,271             1,175             2,619             2,165
                                                                -------------     -------------     -------------     -------------

Other expenses:
        Salaries and employee benefits                                  1,716             1,536             3,341             2,926
        Occupancy and equipment                                           391               330               744               638
        Regulatory assessments                                             33                30                68                64
        Other                                                             821               756             1,635             1,430
                                                                -------------     -------------     -------------     -------------
          Total other expenses                                          2,961             2,652             5,788             5,058
                                                                -------------     -------------     -------------     -------------

          Income before income taxes                                    1,124             1,058             2,398             2,230

Income tax expense                                                        158               217               387               482
                                                                -------------     -------------     -------------     -------------
               Net income                                       $         966               841             2,011             1,748
                                                                =============     =============     =============     =============

               Basic and diluted income per common share        $        0.48              0.42               1.0              0.87
                                                                =============     =============     =============     =============

               Average number of shares outstanding                 2,015,674         2,017,478         2,015,841         2,017,486
                                                                =============     =============     =============     =============

</TABLE>
See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

              HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

    Consolidated Statements of Stockholders' Equity and Comprehensive Income
                                  (unaudited)

                    Six months ended June 30, 1999 and 1998
           (dollars in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                                                             Other                     Total
                                         Preferred     Common               Retained     Comprehensive     Treasury  Stockholders'
                                           Stock       Stock     Surplus    Earnings     Income (Loss)       Stock      Equity
                                       ------------   -------    -------    --------    --------------     --------  -----------
<S>                                    <C>            <C>        <C>        <C>         <C>                <C>       <C>
Balances at December 31, 1997          $         --    10,800      5,400      18,875         (335)      (2,011)           32,729

     Net Income                                  --        --         --       1,748            --          --             1,748

     Net change in unrealized gains
      (losses) on securities available
      for sale, net of tax                       --        --         --          --          404           --               404
                                                                                                                    ------------
        Total comprehensive income                                                                                         2,152

     Cash dividends ($.32 per share)             --        --         --        (645)          --           --              (645)
                                       ------------   -------    -------    --------    ---------     --------      ------------
Balances at June 30, 1998              $         --    10,800      5,400      19,978           69       (2,011)           34,236
                                       ============   =======    =======    ========    =========     ========      ============


Balances at December 31, 1998          $         --    10,800      5,400      21,089          649       (2,027)           35,911

     Net Income                                  --        --         --       2,011           --           --             2,011

     Net change in unrealized gains
     (losses) on securities available
     for sale, net of tax                        --        --         --          --       (2,279)          --            (2,279)
                                                                                                                    ------------
   Total comprehensive income                                                                                               (268)

     Purchase of 700 shares of treasury
        stock                                    --        --         --          --           --          (11)              (11)

     Cash dividends ($.34 per share)             --        --         --        (685)          --           --              (685)
                                       ------------   -------    -------    --------    ---------     --------      ------------

Balances at June 30, 1999              $         --    10,800      5,400      22,415       (1,630)      (2,038)           34,947
                                       ============   =======    =======    ========    =========     ========      ============

</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, 1999 and 1998
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                                            1999                 1998
                                                                                     ---------------          ----------------
<S>                                                                                  <C>                       <C>
Operating activities:
     Net income                                                                       $        2,011                1,748
     Adjustments to reconcile net income to net cash
        provided by operating activities:
               Net amortization of securities                                                    234                  206
               Net gains on securities transactions                                             (187)                 (66)
               Provision for loan losses                                                         300                  293
               Depreciation and amortization                                                     548                  500
               Increase in accrued interest receivable                                          (174)                (130)
               Decrease (increase) in other assets                                            (1,676)                 407
               Decrease in accrued interest payable                                              (72)                 (22)
               Decrease in other liabilities                                                    (427)              (1,149)
                                                                                      --------------       --------------
                    Net cash provided by operating activities                                    557                1,787
                                                                                      --------------       --------------

Investing activities:
     Proceeds from maturities and paydowns of held-to-maturity securities                     13,093               11,857
     Purchases of held-to-maturity securities                                                 (8,426)              (8,756)
     Proceeds from sales of available-for-sale securities                                     31,124               10,017
     Proceeds from maturities and paydowns of available-for-sale securities                   18,351               24,987
     Purchases of available-for-sale securities                                              (64,685)             (28,055)
     Net increase in loans                                                                    (8,586)              (7,955)
     Purchases of bank premises and equipment                                                   (553)                (487)
                                                                                      --------------       --------------
                    Net cash provided by (used in) investing activities                      (19,682)               1,608
                                                                                      --------------       --------------

Financing activities:
     Net increase (decrease) in deposits                                                       2,140               (8,226)
     Payment on notes payable                                                                 (2,282)                (400)
     Cash dividends paid                                                                      (1,008)                (968)
     Purchase of treasury stock                                                                  (11)                  --
                                                                                      --------------       --------------
                    Net cash used in financing activities                                     (1,161)              (9,594)
                                                                                      --------------       --------------

                    Decrease in cash and cash equivalents                                    (20,286)              (6,199)
Cash and cash equivalents at beginning of period                                              36,897               22,138
                                                                                      --------------       --------------

Cash and cash equivalents at end of period                                            $       16,611               15,939
                                                                                      ==============       ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Income taxes paid, net of refunds                                                     $          445                  740
                                                                                      ==============       ==============

Interest paid                                                                         $        5,796                5,834
                                                                                      ==============       ==============
</TABLE>
See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

              HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                 June 30, 1999
(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,
     1998 and 1997, and for each of the years in the three year period ended
     December 31, 1998 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, 1999, are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
                                                                     Gross                Gross
                                              Amortized           Unrealized            Unrealized             Market
                                                Cost                 Gains                Losses                Value
                                         -----------------    -----------------    -----------------     -----------------
U.S. Treasury                          $         --                   --                    --                   --

<S>                                   <C>                     <C>                  <C>                   <C>
U.S. Government agencies                             3,025                    6                   --                 3,031

State and municipal                                 50,495                  354                 (926)               49,923

Mortgage-backed securities
     and collateralized mortgage
     obligations                                    13,842                   15                 (198)               13,659

Other Securities                                     2,373                   --                  (75)                2,298
                                         -----------------    -----------------    -----------------     -----------------
                                         $          69,735                  375               (1,199)               68,911
                                         -----------------    -----------------    -----------------     -----------------
</TABLE>
The amortized cost and approximate market values (carrying value) of securities
     available-for-sale at June 30, 1999, are summarized as follows (in
     thousands of dollars):

<TABLE>
<CAPTION>

                                                                     Gross                Gross
                                           Amortized            Unrealized           Unrealized                Market
                                                Cost                 Gains               Losses                 Value
                                         -----------------    -----------------    -----------------     -----------------
<S>                                      <C>                   <C>                 <C>                    <C>
U.S. Treasury                            $          18,571                    5                 (112)               18,464

U.S. Government agencies                            53,119                   --               (1,372)               51,747

State and municipal                                     --                   --                   --                    --

Mortgage-backed securities
     and collateralized mortgage
     obligations                                    73,044                  261               (1,252)               72,053

Other                                                  467                   --                   --                   467
                                         -----------------    -----------------    -----------------     -----------------
                                         $         145,201                  266               (2,736)              142,731
                                         -----------------    -----------------    -----------------     -----------------
</TABLE>

                                       6
<PAGE>

             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                                 June 30, 1999

(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,
                                                                      1999                   1998
                                                                --------------       -----------------
<S>                                                             <C>                  <C>
               Real estate mortgage                             $       71,502                  64,204
               Commercial and industrial                                36,958                  34,632
               Installment and other                                    31,309                  32,500
                                                                --------------       -----------------
                         Total                                         139,769                 131,336

               Less:
                  Allowance for loan losses                             (1,916)                 (1,701)
                  Unearned discount                                       (303)                   (372)
                                                                --------------       -----------------

                         Loans, net                             $      137,550                 129,263
                                                                ==============       =================

</TABLE>
Changes in the allowance for loan losses for the six months ended June 30, 1999
     and 1998 summarized as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                          1999                    1998
                                                                --------------       -----------------
<S>                                                             <C>                   <C>
               Balance, January 1                               $        1,701                   1,249
                  Provision charged to operating expense                   300                     293
                  Loans charged off                                       (254)                   (126)
                  Recoveries on loans                                      169                      97
                                                                --------------       -----------------

               Balance, June 30                                 $        1,916                   1,513
                                                                ==============       =================
</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, 1999 AND 1998


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

Acquisition
-----------

On December 11, 1998, the Bank acquired all of the outstanding shares of
Jefferson National Bank, located at 109 E. Broadway, Jefferson, Texas, for a
combination of cash and notes payable.  The transaction was accounted for using
the purchase method of accounting and resulted in an increase in total assets of
$31,913,000 and total deposits of $28,564,000.  The Citizens Bank merged
operations of the Jefferson National Bank with the existing Citizens Bank
Jefferson branch at the close of business on December 11, 1998.

Results of Operations
---------------------

Net income for the first six months of 1999 increased to $2,011,000 compared to
$1,748,000 for the same period in 1998. Net interest income for the six months
ended June 30, 1999 was $5,867,000 compared to $5,416,000 for the same period in
1998.  The Company made a provision of $300,000 to the allowance for loan losses
during the first six months of 1999.  A provision of $293,000 was made for loan
losses during the same period in 1998. The Company experienced a net gain on
securities transactions totaling approximately $187,000 in the first six months
of 1999 compared to a net gain of $66,000 in the first six months of 1998.
Other income, excluding net gains on securities transactions, for the first six
months of 1999 was $2,432,000 compared to $2,099,000 for the same period in
1998.  Total other expenses for the first six months of 1999 were $5,788,000
compared to $5,058,000 for the same period in 1998.  Income tax expense for the
first six months of 1999 and 1998 was $387,000 and $482,000, respectively.

        Net Interest Income.  For the six months ended June 30, 1999, net
        -------------------
interest income was $5,867,000 compared to $5,416,000 for the first six months
of 1998. The increase is primarily the result of continued loan growth combined
with growth in loans and deposits as a result of the acquisition of Jefferson
National Bank in December 1998.  Average rates earned generally remained
unchanged while average rates paid were lower during the first six months of
1999 as compared to the same period in 1998.

Net interest income for the three-month period ended June 30, 1999 was
$2,964,000 compared to $2,699,000 in 1998.  The increase is a result of the same
activities noted in the previous paragraph for the first six months of 1999 and
1998.

        Provision for Loan Losses.  During the first six months of 1999, the
        -------------------------
Company increased its allowance for loan losses through a provision of $300,000.
The Company increased its allowance for loan losses during the same period of
1998 by a provision of $293,000.

For the three-month period ended June 30, 1999, the Company increased its
allowance through a provision of $150,000.  The Company increased its allowance
for loan losses during the same period in 1998 by a provision of $164,000.

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

        Other Income.  Non-interest income, excluding securities gains/losses,
        ------------
was $2,432,000 for the first six months of 1999 as compared to $2,099,000 in the
first six months of 1998. This increase is due to increases in service charges
primarily through the initiation of an insufficient funds fee program in March
1998, and an increase in trust revenues. The Company experienced net gains on
securities transactions for the first six months of 1999 of $187,000 as well as
net gains on securities transactions for the first six months of 1998 of
$66,000.

                                       8
<PAGE>

For the three months ended June 30, 1999, non-interest income, excluding
securities gains was $1,271,000 compared to $1,135,000 for the same period in
1998, with the majority of the increase due to the initiation of the
insufficient funds fee program in March 1998, and an increase in trust revenues.
The Company experienced no net gain/loss on securities for the three months
ended June 30, 1999 compared to a net gain on securities transactions of $40,000
for the three months ended June 30, 1998.

        Other Expenses.  Other expenses for the six-month period ended June 30,
        --------------
1999 were $5,788,000 compared to $5,058,000 during the same period in 1998. The
increase in other expenses is due to the increase in salary and related benefit
expense resulting from the opening of an additional facility in Chandler, Texas
and the acquisition of Jefferson National Bank in Jefferson, Texas. Other
expenses also increased due to fees and expenses associated with the initiation
of the insufficient funds fee program and the amortization of goodwill, which
increased due to the acquisition of Jefferson National Bank.

For the three-month period ended June 30, 1999, other expenses were $2,961,000
compared to $2,652,000 during the same period in 1998.

        Income Taxes.  Income tax expense for the first six months of 1999 was
        ------------
$387,000, compared to $482,000 in the same period in 1998. The effective tax
rate for the first six months of 1999 and 1998, respectively, was 16.1% and
21.6%. This effective rate is less than the statutory rate primarily because of
tax-free income provided from state and municipal bonds, leases and obligations.

Income taxes for the three-month periods ended June 30, 1999 and June 30, 1998
were $158,000 and $217,000 respectively.

Financial Condition
-------------------

The Company's total assets at June 30, 1999 of $384,628,000 decreased slightly
from the total assets at December 31, 1998 of $386,919,000. The Company's loan
portfolio grew 6.4% to $137,549,000 at June 30, 1999, up from $129,263,000 at
December 31, 1998. Total deposits were $347,860,000 at June 30, 1999, compared
to the December 31, 1998 total of $345,720,000.

Equity capital of the Company, excluding unrealized gains or losses on
securities available for sale, as a percentage of total assets was 9.5% at June
30, 1999 and 9.3% at December 31, 1998.  The risk-based Tier I and Total capital
ratios and the leverage ratio of Citizens National Bank amounted to 18.3%,
19.4%, and 8.5%, respectively at June 30, 1999 compared to 19.2%, 20.3%, and
8.8%, respectively, at December 31, 1998.

Liquidity and Capital Resources
-------------------------------

At June 30, 1999, the Company's cash and cash equivalents of $16,611,000
decreased significantly from the December 31, 1998 amount of $36,897,000.  This
decrease was due to the transfer of funds to the investment portfolio as well as
funds used to finance new loans.  The Company's stockholders' equity at June 30,
1999 of $34,946,000 remains at a level considered adequate by management.
Profits in excess of dividends paid to shareholders are reflected in the
increase in undivided profits from 1998.

        Operating Activities.  The Company uses cash in the conduct of its
        --------------------
day-to-day operations for such normal purposes as payroll, equipment and
facilities acquisition and maintenance, advertising, data processing, customer
service activity, and administrative activity.  The Company generates cash from
operations primarily from service charges and the net interest earned from the
investment of customer deposits.  Net cash provided by operating activities was
$557,000 and $1,787,000 for the first six months of 1999 and 1998, respectively.

        Investing Activities.  The Company invests available funds primarily
        --------------------
in securities and loans to customers. Funds not otherwise used are invested in
federal funds sold and interest-bearing demand accounts, primarily with the
Federal Home Loan Bank.

        Financing Activities.  In addition to cash provided and used by
        --------------------
operating and investing activities, the Company receives and disburses cash
in connection with customer deposit activities and pays dividends on its common
stock.   During the first six months of 1999, the Company paid off  $2,300,000
in notes payables issued as a result of the acquisitions of First State Bank
Waskom and Jefferson National Bank.

                                       9
<PAGE>

Allowance for Loan Losses
-------------------------

The allowance for loan losses at June 30, 1999 and December 31, 1998 was 1.35%
and 1.30% 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,
1999 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,
                                                                         1999                      1998
                                                                  ---------------            --------------
<S>                                                               <C>                        <C>
Balance at beginning of period                                    $         1,701                     1,249
Charge-offs:
          Commercial, financial, and agricultural                               4                         7
          Real estate-mortgage                                                  9                        --
          Installment loans to individuals                                    241                       119
                                                                  ---------------            --------------
                                                                              254                       126
Recoveries:
          Commercial, financial, and agricultural                              42                        38
          Installment loans to individuals                                    127                        59
                                                                  ---------------            --------------
                                                                              169                        97
                                                                  ---------------            --------------

Net charge-offs                                                                85                        29
                                                                  ---------------            --------------
Additions charged to operations                                               300                       293
                                                                  ---------------            --------------
Balance at end of period                                          $         1,916                     1,513
                                                                  ===============            ==============

Ratio of net charge-offs (recoveries) during the period to
          average loans outstanding during the period                         .07%                       --
                                                                  ===============            ==============
</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>

The following is a summary of the Company's problem loans as of June 30, 1999
and 1998.

<TABLE>
<CAPTION>
                                                                               At June 30,
                                                                         1999               1998
                                                                   --------------     --------------
<S>                                                                <C>                <C>
                                                                         (dollars in thousands)

Nonaccrual loans                                                   $           30                162
Restructured loans                                                             69                 --
Other impaired loans                                                           --                 --
Other real estate                                                             349                184
                                                                   --------------     --------------
          Total non-performing loans                                          448                346
                                                                   ==============     ==============

Loans past due 90+ days and still accruing                                     32                 30
                                                                   ==============     ==============

Other potential problem loans                                                  --                 --
                                                                   ==============     ==============

                                                                           For the six months
                                                                             ended June 30,
                                                                        1999               1998
                                                                   --------------     --------------
                                                                         (dollars in thousands)
Income that would have been recorded in
          accordance with original terms                           $            2                  5
Less income actually recorded                                                  --                 --
                                                                   --------------     --------------
Loss of income                                                     $            2                  5
                                                                   ==============     ==============
</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
51.2% at June 30, 1999) 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.

Securities
----------

The Investment Committee, under the guidance of the Company's Investment Policy,
assesses the short and long-term needs of the Company after consideration of
loan demand, interest rate factors, and prevailing market conditions.
Recommendations for purchases and other transactions are then made considering
safety, liquidity, and maximization of return to the Company.  Management
determines the proper classification of securities at the time of purchase.
Securities that management does not intend to hold to maturity or that might be
sold under certain circumstances are classified as available for sale.  If
management has the intent and the Company has the ability at the time of
purchase to hold the securities until maturity, the securities will be
classified as held to maturity.

The management strategy for securities is to maintain a very high quality
portfolio with generally short duration.  The quality of the portfolio is
maintained with 76% of the total as of June 30, 1999 comprised of U.S. Treasury,
federal agency securities, and agency issued mortgage securities.  Treasury
holdings are currently positioned in a ladder structure.  Three-year treasury
bonds are purchased quarterly, held for two years, then sold with one year left
to maturity to take advantage of the slope in the yield curve.  The
collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS)
held by the company are backed by agency collateral which consists of loans
issued by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Corporation (FNMA), and the Government National Mortgage Association
(GNMA) with a blend of fixed and floating rate coupons.

                                       11
<PAGE>

Credit risk is minimized through agency backing, however, there are other risks
associated with MBS and CMOs.  These other risks include prepayment, extension,
and interest rate risk.  MBS are securities that represent an undivided interest
in a pool of mortgage loans.  CMOs are structured obligations that are derived
from a pool of mortgage loans or agency mortgage backed securities.  CMOs in
general have widely varying degrees of risk, which results from the prepayment
risk on the underlying mortgage loans and its effect on the cash flows of the
security.

Prepayment risk is the risk of borrowers paying off their loans sooner than
expected in a falling rate environment by either refinancing or curtailment.
Extension risk is the risk that the underlying pool of loans will not exhibit
the expected prepayment speeds thus resulting in a longer average life and
slower cash flows than anticipated at purchase.  Interest rate risk is based on
the sensitivity of yields on assets that change in a different time period or in
a different proportion from that of current market interest rates.  Changes in
average life due to prepayments and changes in interest rates in general will
cause the market value of MBS and CMOs to fluctuate.

The Company's MBS portfolio consists of fixed rate balloon maturity pools with
short stated final maturities and adjustable rate mortgage (ARM) pools with
coupons that reset annually and have longer maturities.  Investments in CMOs
consist mainly of Planned Amortization Classes (PAC), Targeted Amortization
Classes (TAC), and sequential classes.  As of June 30, 1999, floating rate
securities made up 66% of the CMO portfolio.  Support and liquidity classes with
longer average lives and floating rate coupons are a relatively small portion of
the portfolio.

To maximize after-tax income, investments in tax-exempt municipal securities are
utilized but with somewhat longer maturities.

At June 30, 1999, the Company's level of structured notes was insignificant.

Securities are the Company's single largest interest-earning asset representing
approximately 55% of total assets at June 30, 1999. The investment portfolio
totaled $212.5 million at June 30, 1999, up from $205.4 million at December 31,
1998.

Recent Accounting Pronouncements Issued but not Effective
---------------------------------------------------------

FASB 133, Accounting for Derivative Instruments and Hedging Activities - This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and for
hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value.  The Statement will be effective for the Company in the year
beginning January 1, 2001.  Due to the Company's limited use of derivative
instruments, the effect of implementation of this new pronouncement is not
expected to have a significant effect on the financial position or results of
operations of the Company.


Year 2000
---------

The Year 2000 ("Y2K") issue relates to the fact that many computer systems,
hardware and software, use a two digit field for the year. The concern is that
on January 1, 2000, a computer system may incorrectly interpret the year 2000 as
1900 causing various mathematical calculations to be wrong. Since 1996, the
Company has been actively preparing for the entry to the year 2000 in an effort
to minimize the impact of the Y2K issue to the Company and its customers. The
Company established a Y2K committee headed by a senior member of the staff. The
Y2K committee reviewed a list of the Company's equipment that might be affected
by any glitch caused by the date rollover to the year 2000 and developed a plan
to test all mission critical systems and remediate if necessary.

By June 30, 1999, the testing of the Company's information technology systems,
such as the main computer system, check sorter, LAN & WAN networks, ATMs, PCs
and core system software was substantially complete and all systems have either
tested compliant or the appropriate upgrade and enhancement has been installed
to remediate the identified problem.

All the non-information technology systems, including security systems, vaults,
elevators and HVAC systems, have been identified and were tested by June 30,
1999.  Like the information technology systems, all of the systems reviewed and
tested to this point have been found to be Y2K compliant or an upgrade or
enhancement has been added to remediate the identified problem.

The Company has also assessed the Y2K risks related to outside companies and
businesses with which it relies to provide service to the Company's customers.
Two of the primary concerns are electrical and telephone service.
Representatives of the Company have been in contact with the various companies
that provide these services in each of its locations and believe, based on
representations given by third parties, that they will be able to provide
continuous service to the Company in the

                                       12
<PAGE>

new millennium. As the Company has become more reliant on its information
technology system, a diesel generator to provide backup electrical power to the
main bank location has been purchased. The generator has been installed and was
operational by June 30, 1999.

The third principal Y2K concern is the Company's correspondent relationship with
the Federal Reserve Bank for the transmission of electronic funds and wire
transfers. Testing with the Federal Reserve has been completed and all tests
have been completed as Y2K compliant.  The Company also maintains accounts with
several major correspondent banks that could be used as alternate source for
wire transfers and clearing checks.

The cost of replacing non-compliant Y2K hardware and software in 1998 was
approximately $57,000. This amount does not include the purchase of a check
sorter and a phone system for the main bank at a cost of approximately $220,000,
as these items were targeted for replacement before it was determined that they
were not Y2K compliant. This amount includes the salary of a person who was
hired in 1998 to assist with the testing for Y2K, but does not include salary
expense for the personnel that were already on staff.  During the first six
months of 1999, the Company spent approximately $28,000 on systems and testing
related to Y2K.

The impact of the Y2K issues on the Company will depend not only on the
corrective steps the Company takes, but will also depend on the way governmental
agencies and other businesses react. Notwithstanding the Company's best efforts,
there can be no assurance that all customers and third party vendors with whom
the Company conducts business will adequately address their Y2K issues. With
this in mind, the Company has developed contingency plans for implementation in
the event a significant third party vendor does not adequately address the Y2K
issues. These plans primarily involve using backup sites, alternate vendors or
internal remediation.

The Company has surveyed various loan and deposit customers regarding their Y2K
readiness and related issues to anticipate how the liquidity of the Company may
be affected. The primary concerns of the Company are whether the Y2K issue may
result in depositors withdrawing funds and whether additional cash reserves will
be required to be on hand to fund liquidity needs of depositors. The Company has
established credit lines at several large correspondents in an abundance of
caution. The Company has reviewed its larger loan commitments to assess the
Company's potential exposure to any of its borrower's lack of Y2K readiness.
This credit risk will be used in calculating the provision for loan loss.

The Company has attempted to address all known Y2K issues in a timely and
correct manner.  Despite the Company's best efforts to accurately plan for the
Year 2000, the results could vary from these estimates if the Company has
unforeseen difficulties in a mission critical system and its ultimate
remediation.

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.

Forward-Looking Information
---------------------------

Statements and financial discussion and analysis by management contained
throughout this Form 10-Q that are not historical facts are forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve a number of
risks and uncertainties.  Various factors could cause actual results to differ
materially from the forward-looking statements, including, without limitation,
changes in interest rates and economic conditions, increased competition for
deposits and loans adversely affecting rtes and terms, changes in availability
of funds increasing costs or reducing liquidity, changes in applicable statutes
and governmental regulations, the Company's ability to successfully complete its
Y2K compliance project in time, and the loss of any member of senior management
or operating personnel and the potential inability to hire qualified personnel
at reasonable compensation levels.

                                       13
<PAGE>

Item 3.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the information related to the market
risk of the Company since December 31, 1998.

                                       14
<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

                                       15
<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:   August 11, 1999           By:  /s/ MILTON S. MCGEE, JR.
      -----------------------         -------------------------
                                      Milton S. McGee, Jr., CPA
                                      President






Date:   August 11, 1999           By:  /s/ REBECCA G. TANNER
      -----------------------         -------------------------
                                      Rebecca G. Tanner, CPA
                                      Chief Accounting Officer

                                       16