<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: September 30, 1999 Commission file number:
33-42286

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

<TABLE>
             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 September 30, 1999, 2,012,000 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>
                                                                  September 30,     December 31,
                                Assets                                1999              1998
                                ------                            -------------     ------------
<S>                                                               <C>               <C>
Cash and due from banks                                           $    12,516            9,493
Interest-bearing deposits with
     other financial institutions                                       8,669           17,174
Federal funds sold                                                        615           10,230
Securities:
   Held-to-maturity, approximate market value of $63,385
     in 1999 and $75,904 in 1998                                       65,190           74,537
   Available-for-sale                                                 133,279          130,886
                                                                  -----------       ----------
                                                                      198,469          205,423
Loans, net                                                            138,358          129,263
Premises and equipment, net                                             6,421            6,202
Accrued interest receivable                                             2,973            3,706
Other assets                                                            8,305            5,428
                                                                  -----------       ----------
                                                                  $   376,326          386,919
                                                                  ===========       ==========
                 Liabilities and Stockholders' Equity
                 ------------------------------------
Deposits:
   Demand - non interest-bearing                                       44,525           42,960
   Interest-bearing transaction accounts                               74,167           85,029
   Money market and savings                                            47,147           47,324
   Certificates of deposit and other time deposits                    173,287          170,407
                                                                  -----------       ----------
                      Total deposits                                  339,126          345,720
                                                                  -----------       ----------
Accrued interest payable                                                1,098            1,325
Notes payable                                                               0            2,282
Other liabilities                                                         717            1,681
                                                                  -----------       ----------
                                                                      340,941          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                                                   23,139           21,089
   Accumulated other comprehensive income (loss)                       (1,851)             649
                                                                  -----------       ----------
                                                                       37,488           37,938
  Less treasury stock, 148,000 shares in 1999
        and 143,626 shares in 1998, at cost                            (2,103)          (2,027)
                                                                  -----------       ----------
                        Total stockholders' equity                     35,385           35,911
Commitments and contingencies
                                                                  -----------       ----------
                                                                  $   376,326          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                  Nine months
                                                                     ended September 30,           ended September 30,

                                                                      1999            1998          1999           1998
                                                                   ----------      ---------      --------       --------
<S>                                                                <C>             <C>            <C>            <C>
Interest income:
   Loans                                                           $    2,819          2,470         8,208          7,128
   Securities
        Taxable - available-for-sale                                    1,984          2,032         6,058          6,359
        Taxable - held-to-maturity                                        282            409           968          1,407
        Tax-exempt                                                        554            436         1,676          1,179
   Federal funds sold                                                      26             60           131            251
   Interest-bearing deposits with other financial
   institutions                                                            99            109           314            420
                                                                   ----------      ---------      --------       --------
          Total interest income                                         5,764          5,516        17,355         16,744
                                                                   ----------      ---------      --------       --------

Interest expense:
   Deposits:
        Transaction accounts                                              402            449         1,301          1,414
        Money market and savings                                          287            309           815            951
        Certificates of deposit and other time deposits                 2,169          2,069         6,455          6,259
   Other                                                                    3             10            14             25
                                                                   ----------      ---------      --------       --------
          Total interest expense                                        2,861          2,837         8,585          8,649
                                                                   ----------      ---------      --------       --------

          Net interest income                                           2,903          2,679         8,770          8,095

Provision for loan losses                                                 (30)           165           270            458
                                                                   ----------      ---------     ---------      ---------
          Net interest income after provision for loan losses           2,933          2,514         8,500          7,637
                                                                   ----------      ---------     ---------      ---------
Other income:
        Service charges, commissions, and fees                            939            802         2,670          2,209
        Income from fiduciary activities                                  260            197           766            602
        Gains on securities transactions, net                               0            216           187            282
        Other                                                             146            134           341            421
                                                                   ----------      ---------     ---------      ---------
          Total other income                                            1,345          1,349         3,964          3,514
                                                                   ----------      ---------     ---------      ---------

Other expenses:
        Salaries and employee benefits                                  1,673          1,448         5,014          4,374
        Occupancy and equipment                                           418            362         1,162          1,000
        Regulatory assessments                                             34             38           102            102
        Other                                                             866            745         2,501          2,175
                                                                   ----------      ---------     ---------      ---------
          Total other expenses                                          2,991          2,593         8,779          7,651
                                                                   ----------      ---------     ---------      ---------
          Income before income taxes                                    1,287          1,270         3,685          3,500

Income tax expense                                                        221            262           608            744
                                                                   ----------      ---------     ---------      ---------
               Net income                                          $    1,066          1,008         3,077          2,756
                                                                   ==========      =========     =========      =========

               Basic and diluted income per common share           $     0.53           0.50          1.53           1.37
                                                                   ==========      =========     =========      =========

               Average number of shares outstanding                 2,014,796      2,017,198     2,015,552      2,017,390
                                                                   ==========      =========     =========      =========
</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)

                Nine months ended September 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                                  --          --         --      2,756                --          --           2,756

     Net change in unrealized gains
     (losses) on securities available
     for sale, net of tax                        --          --         --         --               889          --             889
                                                                                                                       ------------
        Total comprehensive income                                                                                            3,645

     Purchase of 620 shares
     of treasury stock                           --          --         --         --                --          (9)             (9)

     Cash dividends ($.48 per share)             --          --         --       (968)               --          --            (968)
                                       ------------    --------    -------   --------     -------------    --------    ------------
Balances at September 30, 1998         $         --      10,800      5,400     20,663               554      (2,020)         35,397
                                       ============    ========    =======   ========     =============    ========    ============

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

     Net Income                                  --          --         --      3,077                --          --           3,077

     Net change in unrealized gains
     (losses) on securities available
     for sale, net of tax                        --          --         --         --            (2,500)         --          (2,500)
                                                                                                                       ------------
        Total comprehensive income                                                                                              577

     Purchase of 4,374 shares
     of treasury stock                           --          --         --         --                --         (76)            (76)

     Cash dividends ($.51 per share)             --          --         --     (1,027)               --          --          (1,027)
                                       ------------    --------    -------   --------     -------------    --------    ------------
Balances at September 30, 1999         $         --      10,800      5,400     23,139            (1,851)     (2,103)         35,385
                                       ============    ========    =======   ========     =============    ========    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                     Consolidated Statement of Cash Flows
                                  (unaudited)

                 Nine months ended September 30, 1999 and 1998
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    1999             1998
                                                                                    ----             ----
<S>                                                                            <C>               <C>
Operating activities:
     Net income                                                                $    3,077           2,756
     Adjustments to reconcile net income to net cash
        provided by operating activities:
               Net amortization of securities                                         298             327
               Net gains on securities transactions                                  (187)           (282)
               Provision for loan losses                                              270             458
               Depreciation and amortization                                          718             783
               Decrease in accrued interest receivable                                733             146
               Increase in other assets                                            (2,036)            (98)
               Decrease in accrued interest payable                                  (227)            (22)
               Decrease in other liabilities                                         (964)           (762)
                                                                               ----------        ---------
                    Net cash provided by operating activities                       1,682           3,306
                                                                               ----------        --------

Investing activities:
     Proceeds from maturities and paydowns of held-to-maturity securities          19,084          19,458
     Purchases of held-to-maturity securities                                      (8,426)        (15,390)
     Proceeds from sales of available-for-sale securities                          31,124          31,323
     Proceeds from maturities and paydowns of available-for-sale securities        25,957          36,511
     Purchases of available-for-sale securities                                   (64,685)        (50,839)
     Net increase in loans                                                         (9,095)        (14,437)
     Purchases of bank premises and equipment                                        (759)           (811)
                                                                               ----------        --------
                    Net cash provided by (used in) investing activities            (6,800)          5,815
                                                                               ----------        --------

Financing activities:
     Net decrease in deposits                                                     (6,594)          (8,048)
     Payment on notes payable                                                     (2,282)            (400)
     Cash dividends paid                                                          (1,027)          (1,291)
     Purchase of treasury stock                                                      (76)              (9)
                                                                               ----------        --------
                    Net cash used in financing activities                         (9,979)          (9,748)
                                                                               ----------        --------

                    Decrease in cash and cash equivalents                        (15,097)            (627)
Cash and cash equivalents at beginning of period                                  36,897           22,138
                                                                               ---------         --------
Cash and cash equivalents at end of period                                     $  21,800           21,511
                                                                               =========         ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Income taxes paid, net of refunds                                              $     695              744
                                                                               =========         ========
Interest paid                                                                  $   8,812            8,671
                                                                               =========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                              September 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 1998
          Form 10-K.

(2)  Securities
     ----------

     The amortized cost (carrying value) and approximate market values of
          securities held-to-maturity at September 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                     $       --                --                 --           --
      U.S. Government agencies               3,005                 3                 --        3,008
      State and municipal                   47,293               218             (1,756)      45,755
      Mortgage-backed securities and
           collateralized mortgage
           obligations                      12,542                 2               (192)      12,352
      Other Securities                       2,350                --                (80)       2,270
                                        ----------        ----------         ----------    ---------
                                        $   65,190               223             (2,028)      63,385
                                        ----------        ----------         ----------    ---------
</TABLE>

     The amortized cost and approximate market values (carrying value) of
          securities available-for-sale at September 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                     $  17,059                  8                 (72)     16,995
      U.S. Government agencies             50,399                 --              (1,465)     48,934
      State and municipal                      --                 --                   --         --
      Mortgage-backed securities and
           collateralized mortgage
           obligations                     68,159                103              (1,379)     66,883
      Other                                   467                 --                  --         467
                                        ---------         ----------         -----------   ---------
                                        $ 136,084                111              (2,916)    133,279
                                        ---------         ----------         -----------   ---------
</TABLE>

                                       6
<PAGE>

             HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                              September 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>
                                                                September 30,       December 31,
                                                                    1999                1998
                                                                -------------       ------------
                     <S>                                        <C>                 <C>
                     Real estate mortgage                       $     74,515             64,204
                     Commercial and industrial                        34,750             34,632
                     Installment and other                            31,453             32,500
                                                                ------------        -----------
                               Total                                 140,718            131,336
                     Less:
                        Allowance for loan losses                     (2,161)            (1,701)
                        Unearned discount                               (199)              (372)
                                                                ------------        -----------
                               Loans, net                       $    138,358            129,263
                                                                ============        ===========
</TABLE>

     Changes in the allowance for loan losses for the nine months ended
     September 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             270                458
                        Loans charged off                                 (744)              (328)
                        Recoveries on loans                                934                156
                                                                  ------------        -----------
                     Balance, September 30                        $      2,161              1,535
                                                                  ------------        -----------
</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 NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 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 National Bank merged
operations of the Jefferson National Bank with the existing Citizens National
Bank Jefferson branch at the close of business on December 11, 1998.

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

Net income for the first nine months of 1999 increased to $3,077,000 compared to
$2,756,000 for the same period in 1998. Net interest income for the nine months
ended September 30, 1999 was $8,770,000 compared to $8,095,000 for the same
period in 1998. The Company made a provision of $270,000 to the allowance for
loan losses during the first nine months of 1999. A provision of $458,000 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
nine months of 1999 compared to a net gain of $282,000 in the first nine months
of 1998. Other income, excluding net gains on securities transactions, for the
first nine months of 1999 was $3,777,000 compared to $3,232,000 for the same
period in 1998. Total other expenses for the first nine months of 1999 were
$8,779,000 compared to $7,651,000 for the same period in 1998. Income tax
expense for the first nine months of 1999 and 1998 was $608,000 and $744,000,
respectively.

Net income for the three months ended September 30, 1999 increased to $1,066,000
compared to $1,008,000 for the same period in 1998. Net interest income for the
three months ended September 30, 1999 was $2,903,000 compared to $2,679,000 for
the same period in 1998. The Company had a negative provision for loan losses of
$30,000 during the three months ended September 30, 1999. A provision of
$165,000 was made for loan losses during the same period in 1998. The Company
experienced no net gain or loss on securities transactions in the three months
ended September 30, 1999 compared to a net gain of $216,000 in the same period
in 1998. Other income, excluding net gains on securities transactions, for the
three months ended September 30, 1999 was $1,345,000 compared to $1,133,000 for
the same period in 1998. Total other expenses for the three months ended
September 30, 1999 were $2,991,000 compared to $2,593,000 for the same period in
1998. Income tax expense for the three months ended September 30, 1999 and 1998
was $221,000 and $262,000, respectively.

          Net Interest Income. For the nine months ended September 30, 1999, net
          -------------------
interest income was $8,770,000 compared to $8,095,000 for the first nine 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 nine months of
1999 as compared to the same period in 1998.

Net interest income for the three-month period ended September 30, 1999 was
$2,903,000 compared to $2,679,000 in 1998. The increase is a result of the same
factors noted in the previous paragraph for the first nine months of 1999 and
1998.

          Provision for Loan Losses. During the first nine months of 1999,
          -------------------------
the Company increased its allowance for loan losses through a provision of
$270,000. The Company increased its allowance for loan losses during the same
period of 1998 by a provision of $458,000.

For the three-month period ended September 30, 1999, the Company's allowance
decreased by $30,000 primarily as a result of a net recovery situation during
the period ($275,000). The Company had a significant recovery on one customer
amounting to approximately $680,000. The Company increased its allowance for
loan losses during the same period in 1998 by a provision of $165,000.

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

                                       8
<PAGE>

          Other Income. Non-interest income, excluding securities gains/losses,
          ------------
was $3,777,000 for the first nine months of 1999 as compared to $3,232,000 in
the first nine 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 fee income. The Company experienced net
gains on securities transactions for the first nine months of 1999 of $187,000
as well as net gains on securities transactions for the first nine months of
1998 of $282,000.

For the three months ended September 30, 1999, non-interest income, excluding
securities gains was $1,345,000 compared to $1,133,000 for the same period in
1998, with the majority of the increase due to the insufficient funds fee income
and an increase in trust fee income. The Company experienced no net realized
gain/loss on securities transactions for the three months ended September 30,
1999 compared to a net gain on securities transactions of $216,000 for the three
months ended September 30, 1998.

          Other Expenses. Other expenses for the nine-month period ended
          --------------
September 30, 1999 were $8,779,000 compared to $7,651,000 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 September 30, 1999, other expenses were
$2,991,000 compared to $2,593,000 during the same period in 1998. The increased
in other expenses is due to the increase in salary and related benefit expense
as a result of 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 the amortization of goodwill and the additional occupancy
expenses that resulted due to the acquisition of Jefferson National Bank.

          Income Taxes. Income tax expense for the first nine months of 1999 was
          ------------
$608,000, compared to $744,000 in the same period in 1998. The effective tax
rate for the first nine months of 1999 and 1998, respectively, was 16.5% and
21.3%. 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 September 30, 1999 and September
30, 1998 were $221,000 and $262,000 respectively. The effective tax rate for the
three-month periods ended September 30, 1999 and 1998, respectively, was 17.2%
and 20.6%. This effective rate is less than the statutory rate due to the same
reasons stated above.

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

The Company's total assets at September 30, 1999 of $376,326,000 decreased from
the total assets at December 31, 1998 of $386,919,000. The Company's loan
portfolio grew 7.0% to $138,358,000 at September 30, 1999, up from $129,263,000
at December 31, 1998. Total deposits were $339,126,000 at September 30, 1999,
compared to the December 31, 1998 total of $345,720,000. The decrease in
deposits is partially attributed to a loss in public funds of approximately $4.7
million.

Equity capital of the Company, excluding unrealized gains or losses on
securities available for sale, as a percentage of total assets was 9.9% at
September 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 18.9%, 20.1%, and 8.9%, respectively at September 30, 1999 compared to 19.2%,
20.3%, and 8.8%, respectively, at December 31, 1998.

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

At September 30, 1999, the Company's cash and cash equivalents of $21,800,000
decreased significantly from the December 31, 1998 amount of $36,897,000. This
decrease was due to decreased deposits as well as funds used to finance new
loans. The Company's stockholders' equity at September 30, 1999 of $35,385,000
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
$1,682,000 and $3,306,000 for the first nine months of 1999 and 1998,
respectively.

                                       9
<PAGE>

          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 nine 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. Deposits decreased during the first nine months of
1999, which is partially attributable to a loss of public funds of approximately
$4.7 million.

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

The allowance for loan losses at September 30, 1999 and December 31, 1998 was
1.53% 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 September
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 Nine Months Ended
                                                                               September 30,
                                                                         1999                  1998
                                                                      --------               --------
<S>                                                                   <C>                    <C>
Balance at beginning of period                                        $   1,701                 1,249
Charge-offs:
          Commercial, financial, and agricultural                           303                    25
          Real estate-mortgage                                               27                    --
          Installment loans to individuals                                  414                   303
                                                                      ---------              --------
                                                                            744                   328
Recoveries:
          Commercial, financial, and agricultural                           735                    54
          Real estate-mortgage                                               11                    --
          Installment loans to individuals                                  188                   102
                                                                      ---------              --------
                                                                            934                   156
                                                                      ---------              --------

Net recoveries                                                             (190)                 (172)
                                                                      ---------              --------
Additions charged to operations                                             270                   458
                                                                      ---------              --------
Balance at end of period                                              $   2,161                 1,535
                                                                      =========             =========
Ratio of net recoveries during the period to
          average loans outstanding during the period                      (.14)%                (.14)%
                                                                      =========             =========
</TABLE>

                                       10
<PAGE>

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 September 30,
1999 and 1998.

<TABLE>
<CAPTION>
                                                             At September 30,
                                                           1999           1998
                                                         --------       --------
                                                          (dollars in thousands)
<S>                                                      <C>            <C>
Nonaccrual loans                                         $    29            149
Restructured loans                                            --             --
Other impaired loans                                          --             --
Other real estate                                            318             --
                                                         -------         ------
          Total non-performing loans                         347            149
                                                         =======         ======

Loans past due 90+ days and still accruing                    69            182
                                                         =======         ======
Other potential problem loans                                 --             --
                                                         =======         ======
</TABLE>

<TABLE>
<CAPTION>
                                                            For the nine months
                                                            ended September 30,
                                                           1999            1998
                                                         -------         ------
                                                          (dollars in thousands)
<S>                                                      <C>             <C>
Income that would have been recorded in
          accordance with original terms                 $     3              7
Less income actually recorded                                 --             --
                                                         -------         ------
Loss of income                                           $     3              7
                                                         =======         ======
</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
52.9% at September 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.

                                       11
<PAGE>

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 74% of the total as of September 30, 1999 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 September 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.

Securities are the Company's single largest interest-earning asset representing
approximately 53% of total assets at September 30, 1999. The investment
portfolio totaled $198.4 million at September 30, 1999, down 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 September 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 September
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

                                       12
<PAGE>

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 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, tested, and was fully operational as of September 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 no
significant problems have been indicated. 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 nine
months of 1999, the Company spent approximately $42,000 on systems and testing
related to Y2K, in addition to approximately $30,000 spent on the generator and
its installation.

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.

One of the major challenges facing all banks is the notification of their Y2K
readiness to their customers. During 1999, the Company conducted a survey to
help address its customers' concerns, inserted statement stuffers detailing the
Company's Y2K preparations, held seminars at the branch locations, and presented
speakers at various civic club meetings. Representative of the Company also
participated in a meeting sponsored by the City of Henderson to inform citizens
about Y2K issues. The Company plans to mail an additional letter to customers in
November outlining the final steps to be taken by the bank and to inform the
customers how they may obtain information concerning their accounts or other Y2K
related matters.

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 and Use of Proceeds

      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:  November 10, 1999                     By: /s/ Milton S. McGee, Jr.
      -----------------------                    -----------------------------
                                                  Milton S. McGee, Jr., CPA
                                                  President




Date:  November 10, 1999                     By: /s/ Rebecca G. Tanner
     ------------------------                    ---------------------
                                                  Rebecca G. Tanner, CPA
                                                  Chief Accounting Officer

                                       16