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UNITED STATES

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: March 31, 2003

Commission file number: 33-42286

HENDERSON CITIZENS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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)

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 April 30, 2003, 1,994,018 shares of Common Stock, $5.00 par value, were outstanding.

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HENDERSON CITIZENS BANCSHARES, INC.

QUARTER ENDED MARCH 31, 2003

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Balance Sheets

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

See accompanying notes to consolidated financial statements.

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HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Statements of Income—unaudited

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

See accompanying notes to consolidated financial statements.

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HENDERSON CITIZENS BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity—unaudited

Three months ended March 31, 2003 and 2002

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

See accompanying notes to consolidated financial statements.

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HENDERSON CITIZENS BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows—unaudited

Three months ended March 31, 2003 and 2002

(dollars in thousands)

See accompanying notes to consolidated financial statements.

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HENDERSON CITIZENS BANCSHARES, INC.

Notes to Consolidated Financial Statements—unaudited

March 31, 2003

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 three months ended March 31, 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.

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, which is subject to shareholder approval, it is anticipated that approximately 30,237 shares, representing 1.52% of the Company’s common stock, will be converted into the right to receive cash. 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

March 31, 2003

On May 8, 2003, the Company filed a schedule 13E-3 and a preliminary proxy statement on schedule 14A with the SEC providing important details of the merger agreement and the merger. The Company plans to mail to each shareholder a proxy statement about the proposed transaction, and shareholders are advised to read the proxy statement carefully when it becomes available because it will contain important information. Shareholders may obtain free copies of the proxy statement (when available) and other documents filed by the Company at the SEC’s website, www.sec.gov. Free copies of the proxy statement will also be 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, as filed with the SEC on Schedule 14A. 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 when it becomes available.

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

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HENDERSON CITIZENS BANCSHARES, INC.

Notes to Consolidated Financial Statements

March 31, 2003

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

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HENDERSON CITIZENS BANCSHARES, INC.

Notes to Consolidated Financial Statements

March 31, 2003

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

Changes in the allowance for loan losses for the three months ended March 31, 2003 and 2002 are summarized as follows (in thousands of dollars):

On November 26, 2002, Delaware entered into a revolving note with another financial institution 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 balance plus accrued interest is due and payable on November 26, 2003. The interest rate payable by Delaware is Prime less 0.50%, currently 3.75%. The balance of the note at March 31, 2003 is $1,500,000.

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC.

FOR THE THREE MONTHS ENDED MARCH 31, 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 three months of 2003 decreased to $1,451,000, or $0.73 per share, compared to $1,884,000, or $0.94 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 three months ended March 31, 2003 was $4,085,000, a decrease of $31,000 for the three months when compared to the same period in 2002. Average interest-earning assets increased $30,696,000, while the net interest margin decreased from 3.31% at March 31, 2002 to 3.11% at March 31, 2003. Total interest income decreased $631,000 from the previous year during the three month period ended March 31, 2003. The decrease was a result of a decrease in the average yield on interest-bearing assets from 5.94% at March 31, 2002 to 5.25% at March 31, 2003. Even though volumes increased on average interest-bearing liabilities by $16,625,000, interest expense decreased by $600,000 during the three months ended March 31, 2003. This decrease was attributable to a decrease in the average yield on interest-bearing liabilities from 2.87% at March 31, 2002 to 2.18% at March 31, 2003.

Provision for Loan Losses. The provision for loan losses was $261,000 for the first three months of 2003 compared to $260,000 for the first three months of 2002. 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 $2,314,000 for the first three months of 2003 as compared to $2,021,000 in the first three months of 2002. This increase is largely attributable to increases in service charges primarily due to the growth in fees collected for insufficient funds, which is largely attributable to the acquisition of new branch facilities. Increases in ATM and MasterMoney fee income and increases in mortgage-servicing income realized from the sale of FHLMC loans also contributed to the rise in noninterest income. The Company experienced a net gain on securities transactions of $529,000 for the first three months of 2003 compared to a net gain on securities transactions of $862,000 for the first three months of 2002. Given the level of interest rates on securities maturing in an 18-month period, the Company elected to capture most of the gain during the first quarter in anticipation of rising interest rates.

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Noninterest Expenses. Noninterest expenses for the three-month period ended March 31, 2003, were $4,858,000 compared to $4,227,000 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. Telephone expenses for the three months ended March 31, 2003 were $106,000 compared to $111,000 for the same period in 2002.

Income Taxes. Income tax expense for the first three months of 2003 was $358,000, compared to $628,000 in the same period in 2002. The effective tax rates for the first three months of 2003 and 2002 were 19.8% and 25.0%. 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.

Financial Condition

The Company’s total assets at March 31, 2003 of $576,345,000 increased from the total assets at December 31, 2002 of $555,594,000. The Company’s loan portfolio was $222,028,000 at March 31, 2003, down slightly from $226,879,000 at December 31, 2002. Total deposits were $520,189,000 at March 31, 2003, compared to the December 31, 2002 total of $494,951,000.

Deposits and Other Borrowings

Total deposits at March 31, 2003 increased from the December 31, 2002 balances by $25,238,000. This increase was due mostly to an increase in 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 March 31, 2003, amounts payable under this note totaled $351,000 compared to $3,413,000 at December 31, 2002. The decrease was due to remittances made during the three months ended March 31, 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 3.75%. The balance of the note at March 31, 2003 is $1,500,000.

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

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.

Cash and cash equivalents increased $7,796,000 from $28,808,000 at December 31, 2002 to $36,604,000 at March 31, 2003. Cash and cash equivalents represented 6.4% of total assets at March 31, 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 three months of 2002 were the securities purchases of $56,121,000, a net increase in deposits of $25,238,000 and securities maturities and repayments of $23,854,000.

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Capital Resources

At March 31, 2003, stockholders’ equity totaled $48,946,000, or 8.5% of total assets, compared to $48,287,000, or 8.7% of total assets, at December 31, 2002.

The Company and its Bank subsidiary, Citizens National 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 March 31, 2003 and December 31, 2002.

As of March 31, 2003 and December 31, 2002, Citizens National 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 March 31, 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 $225,510,000 at March 31, 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 4.7% in commercial and industrial loans, a minimal decrease of approximately 0.4% in real estate loans, and a decrease of 3.63% in installment loans occurred during the first three 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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Allowance for Loan Losses

The allowance for loan losses at March 31, 2003 and December 31, 2002 was 1.54% 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 March 31, 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 months ended March 31, 2003 totaled $261,000 compared to $260,000 for the three months ended March 31, 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 March 31, 2003 and December 31, 2002.

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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 57.7% at March 31, 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 81% of the total as of March 31, 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 March 31, 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 49.8% of total assets at March 31, 2003. The securities portfolio totaled $286,804,000 at March 31, 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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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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ITEM 4— CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report on Form 10-Q, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or, to the knowledge of the Company’s chief executive officer and chief financial officer, in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date.

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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

During the quarter ended March 31, 2003, the Company filed the following current report on Form 8-K:

On February 23, 2003, Henderson Citizens Bancshares, Inc. issued a press release announcing the execution of an Agreement and a Plan of Merger, dated February 23, 2003, to effect a going private transaction.

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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.

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Certifications

I, Milton S. McGee, Jr. certify that:

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I, Rebecca G. Tanner certify that:

* * * * * * * *

The certification required by Section 906 of the Sarbanes-Oxley Act of 2002 is being furnished to the Securities and Exchange Commission under separate correspondence concurrently with this filing.

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