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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



Commission file number: 33-42286



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HENDERSON CITIZENS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



|Texas                                                          |  | 6712                                                     |  | 75-2371232                       
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (Primary Standard Industrial Classification Code Number) |  | (IRS Employer Identification No.)



201 West Main
Street, P.O. Box 1009

Henderson, Texas 75653-1009

(903) 657-8521

(Address, including ZIP code, and telephone number, including area code, of
registrants principal executive offices)



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes ̈No  x



At July 31, 2003, 1,992,537 shares of Common Stock, $5.00 par value, were
outstanding.



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##### Table of Contents

HENDERSON CITIZENS BANCSHARES, INC.

QUARTER ENDED JUNE 30, 2003



Table of Contents



PART I  FINANCIAL INFORMATION



|ITEM 1  Financial Statements                                                                  |  | Page
|---------------------------------------------------------------------------------------------- |  | ----
|                                                                                               | 
|Consolidated Balance Sheets                                                                    |  | 3   
|                                                                                               | 
|Consolidated Statements of Income                                                              |  | 4   
|                                                                                               | 
|Consolidated Statements of Changes in Stockholders Equity                                     |  | 5   
|                                                                                               | 
|Condensed Consolidated Statements of Cash Flows                                                |  | 6   
|                                                                                               | 
|Notes to Consolidated Financial Statements                                                     |  | 7   
|                                                                                               | 
|ITEM 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|                                                                                               | 
|ITEM 3  Quantitative and Qualitative Disclosure About Market Risk                             |  | 18  
|                                                                                               | 
|ITEM 4  Controls and Procedures                                                               |  | 19  
|                                                                                               | 
|PART II  OTHER INFORMATION                                                                    |  | 20  
|                                                                                               | 
|SIGNATURES                                                                                     |  | 21  
|                                                                                               | 
|CERTIFICATIONS                                                                                 |  | 22  



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

|Item 1. |  | Financial Statements
|------- |  | --------------------



HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)



|                                                                                          |  | June 30, 2003 |         |   | December 31,2002 |        
|----------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | -------
|Assets                                                                                    |  | (unaudited)   |         |   |                  |        
|Cash and due from banks                                                                   |  | $             | 15,451  |   |                  | 16,077 
|Interest-bearing deposits with financial institutions                                     |  |               | 1,442   |   |                  | 1,321  
|Federal funds sold                                                                        |  |               | 10,215  |   |                  | 11,410 
|                                                                                          |  |               |         |   |                  |        
|Total cash and cash equivalents                                                           |  |               | 27,108  |   |                  | 28,808 
|Interest-bearing time deposits                                                            |  |               | 200     |   |                  | 596    
|Securities available for sale, at fair value                                              |  |               | 163,620 |   |                  | 184,274
|Securities held to maturity, estimated fair value of $130,350 in 2003 and $87,816 in 2002 |  |               | 126,280 |   |                  | 85,361 
|Loans, net                                                                                |  |               | 223,184 |   |                  | 226,879
|Premises and equipment, net                                                               |  |               | 12,209  |   |                  | 11,568 
|Accrued interest receivable                                                               |  |               | 3,600   |   |                  | 3,698  
|Goodwill                                                                                  |  |               | 5,876   |   |                  | 5,876  
|Intangible assets, net                                                                    |  |               | 4,741   |   |                  | 4,409  
|Other assets                                                                              |  |               | 6,780   |   |                  | 4,125  
|                                                                                          |  |               |         |   |                  |        
|                                                                                          |  | $             | 573,598 |   |                  | 555,594
|                                                                                          |  |               |         |   |                  |        
|Liabilities and Stockholders Equity                                                      |  |               |         |   |                  |        
|Deposits:                                                                                 |  |               |         |   |                  |        
|Demand  non interest-bearing                                                             |  | $             | 90,365  |   |                  | 76,056 
|Interest-bearing transaction accounts                                                     |  |               | 95,147  |   |                  | 88,405 
|Money market and savings                                                                  |  |               | 82,539  |   |                  | 77,280 
|Certificates of deposit and other time deposits                                           |  |               | 247,218 |   |                  | 253,210
|                                                                                          |  |               |         |   |                  |        
|Total deposits                                                                            |  |               | 515,269 |   |                  | 494,951
|Accrued interest payable                                                                  |  |               | 898     |   |                  | 1,020  
|Other borrowings                                                                          |  |               | 4,255   |   |                  | 4,914  
|Other liabilities                                                                         |  |               | 3,566   |   |                  | 6,422  
|                                                                                          |  |               |         |   |                  |        
|                                                                                          |  |               | 523,988 |   |                  | 507,307
|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                                                                         |  |               | 35,371  |   |                  | 33,342 
|Accumulated other comprehensive income                                                    |  |               | 508     |   |                  | 1,162  
|Treasury stock, 167,463 shares in 2003 and 165,782 shares in 2002, at cost                |  |               | (2,469  | ) |                  | (2,417 
|                                                                                          |  |               |         |   |                  |        
|Total stockholders equity                                                                |  |               | 49,610  |   |                  | 48,287 
|                                                                                          |  |               |         |   |                  |        
|                                                                                          |  | $             | 573,598 |   |                  | 555,594
|                                                                                          |  |               |         |   |                  |        



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Statements of Income

(dollars in thousands, except share amounts)

(unaudited)



|                                                      |  | Three months ended June 30, |           | Six months ended June 30,
|----------------------------------------------------- |  | --------------------------- | --------- | -------------------------
|                                                      |  | 2003                        |           | 2002                     
|Interest income:                                      |  |                             |           |                          
|Loans, including fees                                 |  | $                           | 3,775     |                          
|Securities:                                           |  |                             |           |                          
|Taxable  available for sale                          |  |                             | 1,275     |                          
|Taxable  held to maturity                            |  |                             | 368       |                          
|Tax-exempt  held to maturity                         |  |                             | 622       |                          
|Federal funds sold                                    |  |                             | 62        |                          
|Interest-bearing deposits with financial institutions |  |                             | 6         |                          
|Other interest income                                 |  |                             | 10        |                          
|                                                      |  |                             |           |                          
|Total interest income                                 |  |                             | 6,118     |                          
|                                                      |  |                             |           |                          
|Interest expense:                                     |  |                             |           |                          
|Deposits:                                             |  |                             |           |                          
|Transaction accounts                                  |  |                             | 135       |                          
|Money market and savings                              |  |                             | 139       |                          
|Certificates of deposit and other time deposits       |  |                             | 1,873     |                          
|Other borrowed funds                                  |  |                             | 25        |                          
|                                                      |  |                             |           |                          
|Total interest expense                                |  |                             | 2,172     |                          
|                                                      |  |                             |           |                          
|Net interest income                                   |  |                             | 3,946     |                          
|Provision for loan losses                             |  |                             | 240       |                          
|                                                      |  |                             |           |                          
|Net interest income after provision for loan losses   |  |                             | 3,706     |                          
|                                                      |  |                             |           |                          
|Noninterest income:                                   |  |                             |           |                          
|Service charges, commissions, and fees                |  |                             | 1,819     |                          
|Income from fiduciary activities                      |  |                             | 381       |                          
|Net realized gains on securities transactions         |  |                             | 85        |                          
|Other                                                 |  |                             | 464       |                          
|                                                      |  |                             |           |                          
|Total noninterest income                              |  |                             | 2,749     |                          
|                                                      |  |                             |           |                          
|Noninterest expenses:                                 |  |                             |           |                          
|Salaries and employee benefits                        |  |                             | 2,957     |                          
|Occupancy and equipment                               |  |                             | 634       |                          
|Other                                                 |  |                             | 1,307     |                          
|                                                      |  |                             |           |                          
|Total other expenses                                  |  |                             | 4,898     |                          
|                                                      |  |                             |           |                          
|Income before income tax expense                      |  |                             | 1,557     |                          
|Income tax expense                                    |  |                             | 302       |                          
|                                                      |  |                             |           |                          
|Net income                                            |  | $                           | 1,255     |                          
|                                                      |  |                             |           |                          
|Basic earnings per common share                       |  | $                           | 0.63      |                          
|                                                      |  |                             |           |                          
|Weighted average number of shares outstanding         |  |                             | 1,993,547 |                          
|                                                      |  |                             |           |                          



See accompanying notes
to consolidated financial statements.



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HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders Equity  unaudited

Six months ended June 30, 2003 and
2002

(dollars in thousands, except share and per share amounts)



|                                                                                                                               |  | PreferredStock |   | CommonStock |        | Surplus |       | RetainedEarnings |        |   | AccumulatedOtherComprehensiveIncome (Loss) |       |   | TreasuryStock |        |   | Total |       
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | - | ----------- | ------ | ------- | ----- | ---------------- | ------ | - | ------------------------------------------ | ----- | - | ------------- | ------ | - | ----- | ------
|Balances at January 1, 2002                                                                                                    |  | $              |  |             | 10,800 |         | 5,400 |                  | 29,243 |   |                                            | 903   |   |               | (2,412 | ) |       | 43,934
|Comprehensive income:                                                                                                          |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Net Income                                                                                                                     |  |                |  |             |       |         |      |                  | 3,468  |   |                                            |      |   |               |       |   |       | 3,468 
|Other comprehensive income:                                                                                                    |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Net change in fair value of securities available- for- sale, net of reclassification adjustments of $1,034 and taxes of
$(279) |  |                |  |             |       |         |      |                  |       |   |                                            | (542  | ) |               |       |   |       | (542  
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Total comprehensive income                                                                                                     |  |                |  |             |       |         |      |                  |       |   |                                            |      |   |               |       |   |       | 2,926 
|Purchase of 200 shares of treasury stock                                                                                       |  |                |  |             |       |         |      |                  |       |   |                                            |      |   |               | (5     | ) |       | (5    
|Cash dividends declared ($.34 per share)                                                                                       |  |                |  |             |       |         |      |                  | (679   | ) |                                            |      |   |               |       |   |       | (679  
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Balances at June 30, 2002                                                                                                      |  | $              |  |             | 10,800 |         | 5,400 |                  | 32,032 |   |                                            | 361   |   |               | (2,417 | ) |       | 46,176
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Balances at January 1, 2003                                                                                                    |  | $              |  |             | 10,800 |         | 5,400 |                  | 33,342 |   |                                            | 1,162 |   |               | (2,417 | ) |       | 48,287
|Comprehensive income:                                                                                                          |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Net Income                                                                                                                     |  |                |  |             |       |         |      |                  | 2,706  |   |                                            |      |   |               |       |   |       | 2,706 
|Other comprehensive income:                                                                                                    |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Net change in fair value of securities available-for- sale, net of reclassification adjustments of $614 and taxes of
$(337)    |  |                |  |             |       |         |      |                  |       |   |                                            | (654  | ) |               |       |   |       | (654  
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Total comprehensive income                                                                                                     |  |                |  |             |       |         |      |                  |       |   |                                            |      |   |               |       |   |       | 2,052 
|Purchase of 1,681 shares of treasury stock                                                                                     |  |                |  |             |       |         |      |                  |       |   |                                            |      |   |               | (52    | ) |       | (52   
|Cash dividends declared ($.34 per share)                                                                                       |  |                |  |             |       |         |      |                  | (677   | ) |                                            |      |   |               |       |   |       | (677  
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       
|Balances at June 30, 2003                                                                                                      |  | $              |  |             | 10,800 |         | 5,400 |                  | 35,371 |   |                                            | 508   |   |               | (2,469 | ) |       | 49,610
|                                                                                                                               |  |                |   |             |        |         |       |                  |        |   |                                            |       |   |               |        |   |       |       



See accompanying notes
to consolidated financial statements.



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HENDERSON CITIZENS BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows  unaudited

Six months ended June 30, 2003 and 2002

(dollars in thousands)



|                                                                   |  | 2003 |         |   | 2002 |        
|------------------------------------------------------------------ |  | ---- | ------- | - | ---- | -------
|Net cash from operating activities                                 |  | $    | 1,379   |   |      | 2,583  
|Investing activities:                                              |  |      |         |   |      |        
|Interest-bearing time deposits:                                    |  |      |         |   |      |        
|Purchases                                                          |  |      | (100    | ) |      | (100   
|Maturities                                                         |  |      | 496     |   |      | 5,603  
|Securities available for sale:                                     |  |      |         |   |      |        
|Sales                                                              |  |      | 18,500  |   |      | 55,120 
|Purchases                                                          |  |      | (43,694 | ) |      | (45,096
|Maturities and repayments                                          |  |      | 44,250  |   |      | 25,038 
|Securities held to maturity:                                       |  |      |         |   |      |        
|Purchases                                                          |  |      | (52,460 | ) |      | (46,314
|Maturities and repayments                                          |  |      | 11,386  |   |      | 4,651  
|Net change in loans                                                |  |      | 3,144   |   |      | (8,143 
|Proceeds from sale of premises and equipment and other real estate |  |      | 9       |   |      | 117    
|Purchases of bank premises, equipment and software                 |  |      | (1,286  | ) |      | (516   
|Purchase of Bank Owned Life Insurance                              |  |      | (2,254  | ) |      |       
|Net cash received from acquisition of branch facilities            |  |      |        |   |      | 12,994 
|                                                                   |  |      |         |   |      |        
|Net cash from investing activities                                 |  |      | (22,009 | ) |      | 3,354  
|                                                                   |  |      |         |   |      |        
|Financing activities:                                              |  |      |         |   |      |        
|Net change in deposits                                             |  |      | 20,318  |   |      | (4,169 
|Net change in short-term borrowings                                |  |      | (659    | ) |      | (2,394 
|Cash dividends paid                                                |  |      | (677    | ) |      | (679   
|Purchase of treasury stock                                         |  |      | (52     | ) |      | (5     
|                                                                   |  |      |         |   |      |        
|Net cash from financing activities                                 |  |      | 18,930  |   |      | (7,247 
|                                                                   |  |      |         |   |      |        
|Change in cash and cash equivalents                                |  |      | (1,700  | ) |      | (1,310 
|Cash and cash equivalents at beginning of period                   |  |      | 28,808  |   |      | 35,909 
|                                                                   |  |      |         |   |      |        
|Cash and cash equivalents at end of period                         |  | $    | 27,108  |   |      | 34,599 
|                                                                   |  |      |         |   |      |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES                   |  |      |         |   |      |        
|Income taxes paid, net of refunds                                  |  | $    | 1,300   |   |      | 920    
|                                                                   |  |      |         |   |      |        
|Interest paid                                                      |  | $    | 4,689   |   |      | 5,956  
|                                                                   |  |      |         |   |      |        



See accompanying notes
to consolidated financial statements.



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HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements  unaudited



June 30, 2003



|(1) |  | Basis of Presentation
|--- |  | ---------------------



The accompanying consolidated financial statements of Henderson Citizens Bancshares, Inc. (the Company) 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.



The accompanying consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (SEC) and, therefore, do not purport to contain all the necessary financial disclosures required by accounting principles
generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2002,
included in the Companys annual report on Form 10-K filed with the SEC on March 21, 2003 (the 2002 Form 10-K). Refer to the Companys accounting policies described in the notes to the consolidated financial statements
contained in the 2002 Form 10-K which were consistently followed in preparing this Form 10-Q. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results for the year ending December 31, 2003 or any future
period.



The preparation of these interim
financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The allowance for loan losses, fair
values of financial instruments and repossessed assets and the status of contingencies are particularly subject to change.



The accompanying consolidated financial statements of the Company include the accounts of Henderson Citizens Delaware Bancshares, Inc.
(Delaware), a Delaware corporation, and its wholly owned subsidiary, Citizens National Bank. The financial statements of Citizens National Bank are consolidated with its wholly owned subsidiaries, HCB Insurance Agency, Inc. and Community
Development Corporation (CDC). All significant intercompany balances and transactions have been eliminated in consolidation.



The Company is principally engaged in traditional community banking activities provided through its fourteen full service branches and
its trust office located in east Texas. Community banking activities include the Companys commercial and retail lending, deposit gathering and investment and liquidity management activities. The Company also operates an insurance agency.



Certain amounts in the prior financial
statements have been reclassified to conform to the current presentation.



|(2) |  | Recent Developments
|--- |  | -------------------



On February 23, 2003, the Board of Directors of the Company publicly announced that it had entered an agreement and plan of merger that
will result in the suspension of its duty to file supplemental and periodic information, documents and reports, including Forms 10-K, 10-Q and 8-K, with the SEC. Under the terms of the agreement, shareholders owning less than 500 shares of the
Companys common stock will be entitled to receive $32.00, in cash, for each share they own at the effective time of the merger. Shareholders owning 500 shares or more will continue to hold their shares after the merger.



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HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements



June 30, 2003



On May 8, 2003, the Company filed a schedule 13E-3 and a preliminary proxy statement with the SEC providing important details of the
merger agreement and the merger. The Company has mailed to each shareholder a definitive proxy statement describing the proposed merger and merger agreement, and shareholders are advised to read the proxy statement carefully. Shareholders may obtain
free copies of the proxy statement and other documents filed by the Company at the SECs website, www.sec.gov. Free copies of the proxy statement are available from the Company by directing requests to the attention of Nelwyn Richardson, 201
West Main Street, P. O. Box 1009, Henderson, Texas 75653. The Company, its directors and certain executive officers may be deemed under the rules of the SEC to be participants in the solicitation of proxies from the shareholders of the
Company in favor of the merger agreement. Information about the directors or executive officers of the Company and their ownership of Henderson Citizens common stock is set forth in the proxy statement for Henderson Citizens 2002 annual
meeting of shareholders. Additional information regarding the interests of the participants in the solicitation may be obtained by reading the proxy statement relating to the merger agreement and the merger, which was mailed to
shareholders on or about July 16, 2003.



|(3) |  | Securities
|--- |  | ----------



The amortized cost and estimated fair values of securities available for sale at June 30, 2003 and December 31, 2002, are summarized as
follows (in thousands of dollars):



|                                                                   |  | June 30, 2003    
|------------------------------------------------------------------ |  | -----------------
|                                                                   |  | Amortized Cost   
|U.S. Government agencies                                           |  | $                
|Mortgage-backed securities and collateralized mortgage obligations |  |                  
|                                                                   |  |                  
|                                                                   |  | $                
|                                                                   |  |                  
|                                                                   | 
|                                                                   |  | December 31, 2002
|                                                                   |  | Amortized Cost   
|U.S. Government agencies                                           |  | $                
|Mortgage-backed securities and collateralized mortgage obligations |  |                  
|                                                                   |  |                  
|                                                                   |  | $                
|                                                                   |  |                  



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HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements



June 30, 2003



The amortized cost and estimated fair values of securities held to maturity at June 30, 2003 and December 31, 2002, are summarized as
follows (in thousands of dollars):



|                                                                   |  | June 30, 2003    
|------------------------------------------------------------------ |  | -----------------
|                                                                   |  | Amortized Cost   
|U.S. Government agencies                                           |  | $                
|State and municipal                                                |  |                  
|Mortgage-backed securities and collateralized mortgage obligations |  |                  
|                                                                   |  |                  
|                                                                   |  | $                
|                                                                   |  |                  
|                                                                   | 
|                                                                   |  | December 31, 2002
|                                                                   |  | Amortized Cost   
|U.S. Government agencies                                           |  | $                
|State and municipal                                                |  |                  
|Mortgage-backed securities and collateralized mortgage obligations |  |                  
|Corporate                                                          |  |                  
|                                                                   |  |                  
|                                                                   |  | $                
|                                                                   |  |                  



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HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements



June 30, 2003



|(4) |  | Loans and Allowance for Loan Losses
|--- |  | -----------------------------------



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



|                          |  | June 30, 2003 |         |   | December 31, 2002 |        
|------------------------- |  | ------------- | ------- | - | ----------------- | -------
|Real estate               |  | $             | 132,767 |   |                   | 130,561
|Commercial and industrial |  |               | 59,749  |   |                   | 64,121 
|Installment and other     |  |               | 34,141  |   |                   | 35,649 
|                          |  |               |         |   |                   |        
|Total                     |  |               | 226,657 |   |                   | 230,331
|Less:                     |  |               |         |   |                   |        
|Allowance for loan losses |  |               | (3,473  | ) |                   | (3,450 
|Unearned discount         |  |               |        |   |                   | (2     
|                          |  |               |         |   |                   |        
|Loans, net                |  | $             | 223,184 |   |                   | 226,879
|                          |  |               |         |   |                   |        



Changes in the
allowance for loan losses for the three and six months ended June 30, 2003 and 2002 are summarized as follows (in thousands of dollars):



|                                       |  | Three months ended June 30, |       |   | Six months ended June 30, |      
|-------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | -----
|                                       |  | 2003                        |       |   | 2002                      |      
|Balance, beginning of period           |  | $                           | 3,481 |   |                           | 3,319
|Provision charged to operating expense |  |                             | 240   |   |                           | 230  
|Charge offs:                           |  |                             |       |   |                           |      
|Commercial, financial, and agriculture |  |                             | (136  | ) |                           | (34  
|Real estate-mortgage                   |  |                             | (2    | ) |                           |     
|Installment loans to individuals       |  |                             | (231  | ) |                           | (168 
|Recoveries:                            |  |                             |       |   |                           |      
|Commercial, financial, and agriculture |  |                             | 41    |   |                           | 3    
|Real estate-mortgage                   |  |                             |      |   |                           |     
|Installment loans to individuals       |  |                             | 80    |   |                           | 36   
|                                       |  |                             |       |   |                           |      
|Balance, June 30                       |  | $                           | 3,473 |   |                           | 3,386
|                                       |  |                             |       |   |                           |      



|(5) |  | Notes Payable
|--- |  | -------------



On November 26, 2002, Delaware entered into a revolving note with TIB The Independent Bankers Bank for $2,500,000. Effective May 1, 2003,
the amount of the revolving note was increased to $5,000,000. The note is secured by stock of Citizens National Bank and a guaranty of the Company. The note is payable upon demand, but if no demand is made, interest only payments begin August 26,
2003 and continue at quarterly time intervals thereafter. A final payment of the unpaid principal balance plus accrued interest is due and payable on November 26, 2003. The interest payable by Delaware is 0.500% per annum under the Index Rate
provided that such rate is the most recently published by the Wall Street Journal as the Prime Rate as set forth in the money rates tables therein, or if no such rate is published then any successor rate acceptable to the lender. Currently the rate
is 3.50%. The balance of the note at June 30, 2003 is $1,500,000.



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##### Table of Contents

HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements



June 30, 2003



|(6) |  | Off-Balance Sheet Risk, Commitments and Contingencies
|--- |  | -----------------------------------------------------



Financial instruments with off-balance sheet risk:



The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Companys involvement in particular classes of financial instruments.



The Companys exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments. Financial instruments with contractual or notional amounts that represent credit risk at June 30, 2003 and December 31, 2002 were as follows (in thousands of dollars):



|                             |  | June 30, 2003 |        | December 31, 2002
|---------------------------- |  | ------------- | ------ | -----------------
|Commitments to extend credit |  | $             | 38,986 |                  
|Standby letters of credit    |  |               | 979    |                  



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



Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private short-term borrowing arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to
fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company holds collateral supporting those commitments for which collateral is deemed
necessary. As of June 30, 2003 and December 31, 2002, no amounts have been recorded as liabilities for the Companys potential obligations under these guarantees.



Although the maximum exposure is the amount of these commitments, at June 30, 2003, management anticipates
no material losses from such activities.



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HENDERSON CITIZENS BANCSHARES, INC.



Notes to Consolidated Financial Statements



June 30, 2003



Contingencies:



In August 2002, the Company was named as a respondent in a petition filed in connection with a 2001 Receivership Action against a former
broker that the Company had used for investments in certificates of deposit. The petition alleges the Company received an early redemption of its investment in certificates of deposit and is obligated to return the approximately $4.6 million that it
received. On July 10, 2003, the court ordered that the petition be deemed a complaint. The Company responded to the receivers complaint on July 30, 2003. Based upon court filings by the Receiver, management believes that recoveries for the
claimants in the Receivership Action will be approximately 85-90% of alleged losses. The Receiver has taken the position in this suit that parties, such as the Company, would be entitled to file a claim with the Receiver for their investments if
they were required to pay back funds transferred from the broker. Accordingly, if the Company were required to pay back the $4.6 million to the Receiver, the Company would be entitled to file a claim with the receiver as a creditor of the
brokers estate. Therefore, even if the court were to overrule the procedural defenses of the Company, and the Receiver were to sustain his burden to prove his claims, the Company could reasonably expect to keep 85-90% of its $4.6 million
investment with the broker. As of June 30, 2003, the Company had accrued $780,000 for potential losses representing approximately 15% of its investment plus expected legal costs.



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##### Table of Contents

ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION

AND RESULTS OF OPERATIONS
OF HENDERSON CITIZENS BANCSHARES, INC.

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002



The following discussion and analysis of the consolidated financial condition and results of
operations of the Company 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.



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
rates and terms, changes in availability of funds increasing costs or reducing liquidity, changes in applicable statutes and governmental regulations, and the loss of any member of senior management or operating personnel and the potential inability
to hire qualified personnel at reasonable compensation levels.



Results
of Operations



Net income for the first six months of 2003 decreased
to $2,706,000, or $1.36 per share, compared to $3,468,000, or $1.74 per share for the same period in 2002. Net income for the three months ended June 30, 2003 decreased to $1,255,000, or $0.63 per share, compared to $1,584,000, or $0.79 per share
for the same period in 2002. Details of the components of net income are discussed below.



Net Interest Income.Net interest income for the six months ended June 30, 2003 was $8,031,000, a decrease of $406,000 for the six months when compared to the same period in 2002. Average
interest-earning assets increased $31,657,000, while the net interest margin decreased from 3.38% at June 30, 2002 to 3.04% at June 30, 2003. Total interest income decreased $1,621,000 from the previous year during the six month period ended June
30, 2003. The decrease was a result of a decrease in the average yield on interest-bearing assets from 6.03% at June 30, 2002 to 5.11% at June 30, 2003. Even though volumes increased on average interest-bearing liabilities by $15,877,000, interest
expense decreased by $1,215,000 during the six months ended June 30, 2003. This decrease was attributable to a decrease in the average yield on interest-bearing liabilities from 2.77% at June 30, 2002 to 2.09% at June 30, 2003.



Net interest income for the three-month period ended June 30, 2003 was $3,946,000 compared to
$4,321,000 in 2002. Interest income decreased $990,000 for the three months ended June 30, 2003, due largely to a decrease on the average yield on interest-bearing assets, as compared to the same period in 2002. Interest expense decreased $615,000
due to a decline in average interest rates paid in the three months ended June 30, 2003, as compared to the same period in 2002.



Provision for Loan Losses.The provision for loan losses was $501,000 for the first six months of 2003 compared to $490,000 for the first
six months of 2002. For the three months ended June 30, 2003, the Company increased its allowance through a provision of $240,000. The Company increased its allowance for loan losses during the same period in 2002 by a provision of $230,000. See
Managements Discussion and Analysis of the Financial Condition and Results of Operations of the CompanyAllowance for Loan Losses for a more detailed discussion relative to the provision for loan losses.



Noninterest Income.Noninterest income, excluding securities
gains/losses, was $4,978,000 for the first six months of 2003 as compared to $4,265,000 in the first six months of 2002. This increase is largely attributable to increases in service charges primarily due to the growth in fees collected for
insufficient funds. Increases in mortgage-servicing income realized from the sale of FHLMC loans, increases in ATM and MasterMoney fee income and increases in income from loan fees also contributed to the rise in noninterest income. The Company
experienced a net gain on securities transactions of $614,000 for the first six months of 2003 compared to a net gain on securities transactions of $1,034,000 for the first six months of 2002. In 2003, fixed rate mortgage-backed securities were sold
to capture the gain as prepayments began to increase. The Company elected to capture most of the gain during the first quarter of 2002 in anticipation of rising interest rates, given the level of interest rates on securities maturing in an 18-month
period.



For the three months ended June 30, 2003, noninterest income,
excluding securities gains was $2,664,000 compared to $2,244,000 for the same period in 2002. The increase is a result of the same activities noted in the previous paragraph regarding the first six months of 2003. The Company experienced a net gain
on securities of $85,000 for the three months ended June 30, 2003, compared to a net gain on securities of $172,000 during the same period in 2002.



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##### Table of Contents

Noninterest Expenses. Noninterest expenses for the six-month period ended June 30, 2003,
were $9,756,000 compared to $8,674,000 during the same period in 2002. The increase in other expenses is primarily due to the increase in salary and related benefits expense resulting from normal year-end salary increases in the current year
combined with the additional expense of employees added in the acquisition of two branch facilities in April of 2002. Occupancy expenses continue to increase with the addition of new facilities and the remodeling of existing properties. Noninterest
expenses also increased due to the acquisition of new branches, which increased the amortization expense for other intangible assets and resulted in higher expenses overall as a result of the Companys growth.



Noninterest expenses for the three-month period ended June 30, 2003, were $4,898,000 compared
to $4,447,000 during the same period in 2002. The increase is a result of the same activities noted in the previous paragraph regarding the first six months of 2003.



Income Taxes.Income tax expense for the first six months of 2003 was $660,000, compared to $1,104,000 in the
same period in 2002. The effective tax rates for the first six months of 2003 and 2002 were 19.6% and 24.1%. The effective rates are less than the statutory rate of 34% 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, 2003 and June 30, 2002 were $302,000 and $476,000 respectively. The effective tax rates for the three-month periods ended June 30, 2003 and June 30, 2002 were 19.4% and 23.1%.



Financial Condition



The Companys total assets at June 30, 2003 of $573,598,000 increased from the total assets at December 31, 2002 of $555,594,000. The Companys loan portfolio
was $223,184,000 at June 30, 2003, down slightly from $226,879,000 at December 31, 2002. Total deposits were $515,269,000 at June 30, 2003, compared to the December 31, 2002 total of $494,951,000.



Deposits and Other Borrowings



Total deposits at June 30, 2003 increased from the December 31, 2002 balances by
$20,318,000. This increase was due largely to an increase in commercial deposits and public funds.



During July 2000, the Company changed from the Treasury Tax and Loan Daily Remittance Option to the Treasury Tax and Loan Note Option, which allows the Company to keep on deposit customer tax payments for short
periods of time until withdrawn by the Treasury. At June 30, 2003, amounts payable under this note totaled $2,755,000 compared to $3,413,000 at December 31, 2002. The decrease was due to remittances made during the six months ended June 30, 2003.



Effective November 26, 2002, Delaware entered into a revolving note with TIB
The Independent Bankers Bank for $2,500,000. Effective May 1, 2003, the amount of the revolving note was increased to $5,000,000. The note is secured by stock of Citizens National Bank and a guaranty of the Company. The note is payable upon demand,
but if no demand is made, interest only payments begin August 26, 2003 and continue at quarterly time intervals thereafter. A final payment of the unpaid principal balance plus accrued interest is due and payable on November 26, 2003. The interest
payable by Delaware is 0.500% per annum under the Index Rate provided that such rate is the most recently published by the Wall Street Journal as the Prime Rate as set forth in the money rates tables therein, or if no such rate is published then any
successor rate acceptable to the lender. Currently the rate is 3.50%. The balance of the note at June 30, 2003 is $1,500,000.



The Company does not anticipate any material impact upon the Company or its operations as a result of the borrowing.



Liquidity



Liquidity is the ability of the Company to fund customers needs for borrowing and deposit withdrawals. The purpose of liquidity
management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the institutions financial strength, asset quality and types of deposit
and investment instruments offered by the Company to its customers. The Companys principal sources of funds are deposits, loan and securities repayments, maturities of securities, sales of securities available for sale and other funds provided
by operations. The Company also has various federal funds sources from correspondent banks. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments
are more influenced by interest rates, general economic conditions and competition. The Company maintains investments in liquid assets based upon managements assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on
short-term liquid assets and (4) objectives of the asset/liability management program.



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##### Table of Contents

Cash and cash equivalents decreased $1,700,000 from $28,808,000 at December 31, 2002 to $27,108,000 at June 30, 2003.
Cash and cash equivalents represented 4.7% of total assets at June 30, 2003 compared to 5.2% of total assets at December 31, 2002. The Company has the ability to borrow federal funds from various correspondent banks should the Company need to
supplement its future liquidity needs in order to meet deposit flows, loan demand or to fund investment opportunities. Management believes the Companys liquidity position is sufficient to meet the Companys needs for at least the next
twelve months based on its level of cash and cash equivalents, core deposits, the stability of its other funding sources and the support provided by its capital base.



As summarized in the Consolidated Statements of Cash Flows, the most significant transactions that affected the Companys level of cash
and cash equivalents, cash flows and liquidity during the first six months of 2003 were the securities purchases of $96,154,000, securities maturities and repayments of $55,636,000, and a net increase in deposits of $20,318,000.



Capital Resources



At June 30, 2003, stockholders equity totaled $49,610,000, or 8.6% of total assets,
compared to $48,287,000, or 8.7% of total assets, at December 31, 2002.



The
Company and its subsidiary, Citizens National Bank (the Bank), are subject to regulatory capital requirements administered by federal banking agencies. Bank regulators monitor capital adequacy very closely and consider it an important
factor in ensuring the safety of depositors accounts. As a result, bank regulators have established standard risk based capital ratios that measure the amount of an institutions capital in relation to the degree of risk contained in the
balance sheet, as well as off-balance sheet exposure. Federal law requires each federal banking regulatory agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall
below one or more prescribed capital ratios. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6.0% and 10.0% of risk-weighted assets, respectively, are considered well capitalized. Tier 1
capital is shareholders equity excluding the unrealized gain or loss on securities classified as available for sale and intangible assets. Tier 2 capital, or total capital, includes Tier 1 capital plus the allowance for loan losses not to
exceed 1.25% of risk weighted assets. Risk weighted assets are the Companys total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk. In addition to the risk-weighted ratios, all
institutions are required to maintain Tier 1 leverage ratios of at least 5.0% to be considered well capitalized and 4.0% to be considered adequately capitalized. The leverage ratio is defined as Tier 1 capital divided by
adjusted average assets for the most recent quarter.



The tables below set
forth the Consolidated and Citizens National Bank only capital ratios as of June 30, 2003 and December 31, 2002.



|                                             |  | Consolidated |   |  | Bank Only |  
|-------------------------------------------- |  | ------------ | - |  | --------- | -
|June 30, 2003                                |  |              |   |  |           |  
|Tier 1 capital to risk-weighted assets ratio |  | 15.4         | % |  | 15.9      | %
|Total capital to risk-weighted assets ratio  |  | 16.7         |   |  | 17.2      |  
|Leverage ratio                               |  | 7.0          |   |  | 7.2       |  
|                                             |  |             
|December 31, 2002                            |  |              |   |  |           |  
|Tier 1 capital to risk-weighted assets ratio |  | 14.7         | % |  | 15.1      | %
|Total capital to risk-weighted assets ratio  |  | 15.9         |   |  | 16.4      |  
|Leverage ratio                               |  | 6.8          |   |  | 7.0       |  



As of June 30, 2003 and December 31,
2002, the Bank met the level of capital required to be categorized as well capitalized under prompt corrective action regulations. Management is not aware of any conditions subsequent to June 30, 2003 and December 31, 2002 that would change the
Companys or the Banks capital categories.



Loans



The Companys loan portfolio consists primarily of real estate,
commercial and industrial, and consumer loans. Gross loans were $226,657,000 at June 30, 2003 compared to $230,331,000 at December 31, 2002.



As can be seen in the table in Note 4 in the accompanying Notes to Consolidated Financial Statements, a decrease of approximately 6.8% in commercial and industrial loans,
an increase of approximately 1.7% in real estate loans, and a decrease of 4.2% in installment loans occurred during the first six months of 2003. The decrease in commercial and industrial loans was primarily due to the payoff of a single commercial
creditor. The decrease in installment loans is due to a continuing economic slow-down combined with the availability of zero percent financing by automobile makers.



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##### Table of Contents

Allowance for Loan Losses



The allowance for loan losses at June 30, 2003 and December 31, 2002 was 1.53% and 1.50% of gross 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, the allowance at June 30, 2003 represents managements best estimate of probable losses that have been incurred within the existing portfolio of loans. A migration analysis and an internal classification system for loans
also help identify potential problems, if any, which 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 guidelines established by the Office of the Comptroller of Currency to help ensure that an adequate allowance is maintained.



The provision for loan losses is determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level, which is considered adequate to absorb losses inherent in the loan portfolio. The amount of the provision is based on managements review of
the loan portfolio, and the consideration of such factors as historical loss experience, general prevailing economic conditions, changes in the size and composition of the loan portfolio and specific borrower considerations, including the ability of
the borrower to repay the loan and the estimated value of the underlying collateral.



The provision for loan losses for the three and six months ended June 30, 2003 totaled $240,000 and $501,000 compared to $230,000 and $490,000 for the three and six months ended June 30, 2002. Management anticipates it will continue its
provisions to the allowance for loan losses at current levels for the near future, providing the volume of nonperforming loans remains insignificant, to compensate for overall loan growth, increased charge-offs, and general economic concerns.



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.



The
following is a summary of the Companys problem loans as of June 30, 2003 and December 31, 2002.



|                                                     |  | June 30, 2003          |     | December 31, 2002
|---------------------------------------------------- |  | ---------------------- | --- | -----------------
|                                                     |  | (dollars in thousands)
|Nonaccrual loans                                     |  | $                      | 87  |                  
|Restructured loans                                   |  |                        |    |                  
|Other impaired loans                                 |  |                        | 146 |                  
|Loans past due 90+ days and still accruing           |  |                        | 416 |                  
|                                                     |  |                        |     |                  
|Total non-performing loans                           |  | $                      | 649 |                  
|                                                     |  |                        |     |                  
|Other potential problem loans                        |  | $                      |    |                  
|                                                     |  |                        |     |                  
|Other non-performing assets, other real estate owned |  | $                      | 102 |                  
|                                                     |  |                        |     |                  



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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 58.6% at June 30, 2003) 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 4 in the accompanying Notes to 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 79% of the total as of June 30, 2003 comprised of U.S. Treasury, federal
agency securities, and agency issued mortgage securities. 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.



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, 2003, floating rate securities made up 4% of the CMO portfolio. Support and liquidity classes with longer average lives and floating rate coupons comprise 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.



Securities are the Companys single largest interest-earning asset representing approximately 50.5% of total assets at June 30, 2003. The securities portfolio totaled $289,900,000 at June 30, 2003, up from $269,635,000 at December 31,
2002. This increase resulted due to an increase in deposits combined with excess cash being invested in mortgage-backed securities and government agency securities for increased yields.



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##### Table of Contents

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Companys primary market risk exposures are interest rate risk and, to a lesser extent, liquidity risk. The Company does not maintain a trading account for any class of financial instrument and the Company is
not affected by foreign currency exchange rate risk or commodity price risk.



Interest rate risk is the risk that the Companys financial condition will be adversely affected due to movements in interest rates. The Company, like other financial institutions, is subject to interest rate risk to the extent that
its interest-earning assets reprice differently than its interest-bearing liabilities. The income of financial institutions is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing
liabilities. A high ratio of interest sensitive liabilities tends to benefit net interest income during periods of falling interest rates as the average rate paid on interest-bearing liabilities declines faster than the average rate earned on
interest-earning assets. The opposite holds true during periods of rising interest rates. One of the Companys principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuations in interest rates.
Management recognizes certain risks are inherent and that the goal is to measure the effect on net interest income and to adjust the balance sheet to minimize the risk while at the same time maximize income. Accordingly, the Company places great
importance on monitoring and controlling interest rate risk.



There are several
methods employed by the Company to monitor and control interest rate risk. One such method is using a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based
on either an immediate rise or fall in interest rates (rate shock) over a twelve-month period. The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities. The repricing can occur due to
changes in rates on variable rate products as well as maturities of interest-earning assets and interest-bearing liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets
and liabilities as well as projections for anticipated activity levels by product lines offered by the Company. The simulation model also takes into account the Companys historical core deposits. Management considers the Companys market
risk to be acceptable at this time.



One strategy used by the Company to reduce
the volatility of its net interest income is to originate variable rate loans tied to market indices. Such loans reprice on an annual, quarterly, monthly or daily basis as the underlying market index change. Currently, approximately 17% of the
Companys loan portfolio reprices on at least an annual basis.



The
Company has also structured the securities portfolio so that most of the mortgage-backed securities reprice on at least an annual basis. The Company also maintains most of its securities in the available for sale portfolio to take advantage of
changes in interest rates and to maintain liquidity for loan funding and deposit withdrawals. The mortgage-backed and related securities also provide the Company with a constant cash flow stream from principal repayments. The Company invests
short-term excess funds in overnight federal funds that mature and reprice on a daily basis.



The Companys 2002 annual report details a table that provides information about the Companys financial instruments that are sensitive to changes in interest rates as of December 31, 2002. The table is
based on information and assumptions set forth in the discussion. The Company believes the assumptions utilized are reasonable. Management believes that no events have occurred since December 31, 2002 which would significantly change the ratio of
rate sensitive assets to rate sensitive liabilities for the given time horizons in the table.



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##### Table of Contents

ITEM 4  DISCLOSURE CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



As of
the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the
Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.



Changes in Internal Controls



There was no change in
the Companys internal control over financial reporting during the Companys most recently completed fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Companys internal control over
financial reporting.



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##### Table of Contents

Part II  OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



None



|Item 2. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------



None



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



None



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



On April 15, 2003, the Company held its annual meeting of shareholders. At the meeting, the following directors were elected for a term of one year.



David Alford

Landon Alford

R.M. Ballenger

S.M. Bonner, Jr.

D.J. Burks

Billy Crawford

Sheila Smith Gresham

Jim Kangerga

Milton S. McGee,
Jr.

J. Mark Mann

Charles
Richardson

Tony Wooster

William E. Wylie



Regarding the election of directors,
the Balloting and Credentials Committee reported that 1,548,302 shares were voted, all by proxy, giving the total shares voted at 77.65% of the total shares outstanding.



|Item 5. |  | Other Information
|------- |  | -----------------



None



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



(a) Exhibits



Exhibits 31.1 and 31.2 Certifications of Chief Executive Officer and Chief Financial Officer of Henderson Citizens Bancshares, Inc. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002



Exhibits 32.1 and 32.2
Certifications of Chief Executive Officer and Chief Financial Officer of Henderson Citizens Bancshares, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



(b) Reports on Form 8-K



None



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##### Table of Contents

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 13, 2003 |  |  |  | By:                                
|                      |  |  |  |                                    
|                      |  |  | 
|Date: August 13, 2003 |  |  |  | By:                                
|                      |  |  |  |                                    



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