|UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington,
D.C. 20549FORM 10-Q


(Mark One)


|X| QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2002.


OR


|_| TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________ TO ____________


COMMISSION FILE NUMBER:
000-24235


GUARANTY BANCSHARES,
INC.(Exact name of registrant as specified in its charter)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|TEXAS(State or other jurisdiction ofincorporation or organization) | 75-16516431(I.R.S. EmployerIdentification No.)
|------------------------------------------------------------------ | ----------------------------------------------

|100 W. ARKANSAS
MT. PLEASANT, TEXAS 75455
(Address of principal executive offices, including zip code)


903-572-9881
(Registrants telephone number, including area code)


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


As of August 12, 2002,
there were 2,996,428 shares of the registrants Common Stock, par value
$1.00 per share, outstanding.



GUARANTY BANCSHARES, INC.
INDEX TO FORM 10-Q
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART I - FINANCIAL INFORMATION |  | Page
|------------------------------ |  | ----

| | Item 1. |  | Financial Statements                                                                  |  |   
| | ------- |  | ------------------------------------------------------------------------------------- |  | --
| |         |  | Consolidated Balance Sheets                                                           |  | 3 
| |         |  | Consolidated Statements of Earnings                                                   |  | 4 
| |         |  | Condensed Consolidated Statements of Changes in Shareholders Equity                  |  | 5 
| |         |  | Condensed Consolidated Statements of Cash Flows                                       |  | 6 
| |         |  | Consolidated Statements of Comprehensive Income                                       |  | 7 
| |         |  | Notes to Consolidated Financial Statements                                            |  | 8 
| | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12
| | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 23

|PART II - OTHER INFORMATION |  | 
|--------------------------- |  | 

| | Item 1.    |  | Legal Proceedings                                   |  | 24
| | ---------- |  | --------------------------------------------------- |  | --
| | Item 2.    |  | Changes in Securities and Use of Proceeds           |  | 24
| | Item 3.    |  | Defaults upon Senior Securities                     |  | 24
| | Item 4.    |  | Submission of Matters to a Vote of Security Holders |  | 24
| | Item 5.    |  | Other Information                                   |  | 24
| | Item 6.    |  | Exhibits and Reports on Form 8-K                    |  | 24
| | Signatures |  | 25                                                 

|2



PART I  FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                | June 30,2002 |  | December 31,2001 |        
|--------------------------------------------------------------- | ------------ |  | ---------------- | -------
|
|ASSETS                                                         
|                                                                |              |  |                  |        
|Cash and cash equivalents                                       |              |  | $                | 10,305 
|Federal funds sold                                              |              |  |                  | 12,775 
|Securities available-for-sale                                   |              |  |                  | 94,707 
|Loans, net of allowance for loan losses of $3,576 and $3,346    |              |  |                  | 344,387
|Premises and equipment, net                                     |              |  |                  | 13,386 
|Other real estate                                               |              |  |                  | 1,896  
|Accrued interest receivable                                     |              |  |                  | 3,053  
|Goodwill                                                        |              |  |                  | 2,338  
|Other assets                                                    |              |  |                  | 8,699  
|                                                                |              |  |                  |        
|Total assets                                                    |              |  | $                | 491,546
|                                                                |              |  |                  |        
|                                                               
|LIABILITIES AND SHAREHOLDERS EQUITY                           
|                                                               
|Liabilities                                                     |              | 
|Deposits:                                                       |              | 
|Noninterest-bearing                                             |              |  | $                | 67,755 
|Interest-bearing                                                |              |  |                  | 335,012
|                                                                |              |  |                  |        
|Total deposits                                                  |              |  |                  | 402,767
|FHLB advances                                                   |              |  |                  | 42,930 
|Long-term debt                                                  |              |  |                  | 7,000  
|Other liabilities                                               |              |  |                  | 5,103  
|                                                                |              |  |                  |        
|Total liabilities                                               |              |  |                  | 457,800
|                                                                |              |  |                  |        
|Shareholders equity:                                           |              | 
|Preferred stock, $5.00 par value, 15,000,000 shares authorized, |              | 
|no shares issued                                                |              |  |                  |       
|Common stock, $1.00 par value, 50,000,000 shares authorized,    |              | 
|3,252,016 issued at June 31, 2002 and                           |              | 
|3,250,016 at December 31, 2001                                  |              |  |                  | 3,252  
|Additional capital                                              |              |  |                  | 12,676 
|Retained earnings                                               |              |  |                  | 19,348 
|Treasury stock, 255,588 and 245,588 shares at cost              |              |  |                  | (2,783 
|Accumulated other comprehensive income                          |              |  |                  | 1,253  
|                                                                |              |  |                  |        
|Total shareholders equity                                      |              |  |                  | 33,746 
|                                                                |              |  |                  |        
|Total liabilities and shareholders equity                      |              |  | $                | 491,546
|                                                                |              |  |                  |        

|See accompanying Notes to Consolidated Financial Statements.


3



GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Three Months EndedJune 30, |  | Six Months EndedJune 30, |      
|--------------------------------------------------- | -------------------------- |  | ------------------------ | -----
|
|Interest income:                                    |                            |  |                          |      
|Loans                                               |                            |  | $                        | 5,935
|Securities                                          |                            |  |                          | 1,203
|Federal funds sold and other temporary investments  |                            |  |                          | 56   
|                                                    |                            |  |                          |      
|Total interest income                               |                            |  |                          | 7,194
|Interest expense:                                   |                            | 
|Deposits                                            |                            |  |                          | 2,514
|FHLB advances and other borrowed funds              |                            |  |                          | 585  
|                                                    |                            |  |                          |      
|Total interest expense                              |                            |  |                          | 3,099
|                                                    |                            |  |                          |      
|Net interest income                                 |                            |  |                          | 4,095
|Provision for loan losses                           |                            |  |                          | 450  
|                                                    |                            |  |                          |      
|Net interest income after provision for loan losses |                            |  |                          | 3,645
|Noninterest income:                                 |                            | 
|Service charges                                     |                            |  |                          | 761  
|Other operating income                              |                            |  |                          | 434  
|Realized gain on available-for-sale securities      |                            |  |                          | 280  
|                                                    |                            |  |                          |      
|Total noninterest income                            |                            |  |                          | 1,475
|Noninterest expense:                                |                            | 
|Employee compensation and benefits                  |                            |  |                          | 2,107
|Occupancy expenses                                  |                            |  |                          | 486  
|Other operating expenses                            |                            |  |                          | 981  
|                                                    |                            |  |                          |      
|Total noninterest expenses                          |                            |  |                          | 3,574
|                                                    |                            |  |                          |      
|Earnings before income taxes                        |                            |  |                          | 1,546
|Provision for income taxes                          |                            |  |                          | 453  
|                                                    |                            |  |                          |      
|Net earnings                                        |                            |  | $                        | 1,093
|                                                    |                            |  |                          |      
|Basic earnings per common share                     |                            |  | $                        | 0.36 
|                                                    |                            |  |                          |      
|Diluted earnings per common share                   |                            |  | $                        | 0.36 
|                                                    |                            |  |                          |      

|See accompanying Notes to Consolidated Financial Statements.


4



GUARANTY BANCHSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             | Three Months EndedJune 30, |  | Six Months EndedJune 30, |       
|------------------------------------------------------------ | -------------------------- |  | ------------------------ | ------
|
|Balance at beginning of period                               |                            |  | $                        | 32,568
|Net income                                                   |                            |  |                          | 1,093 
|Cash dividends declared on common stock                      |                            |  |                          | (450  
|Purchases of treasury stock                                  |                            |  |                          |      
|Proceeds from stock option exercises                         |                            |  |                          | 19    
|Change in accumulated other comprehensive income, net of tax |                            |  |                          | 516   
|                                                             |                            |  |                          |       
|Balance at end of period                                     |                            |  | $                        | 33,746
|                                                             |                            |  |                          |       

|See accompanying Notes to Consolidated Financial Statements.


5



GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | Six MonthsEnded June 30, | 
|------------------------------------------------ | ------------------------ | 
|
|Net cash from operating activities               |                          | 
|                                                
|Cash flows from investing activities:            |                          | 
|Securities available for sale:                   |                          | 
|Purchases                                        |                          | 
|Sales                                            |                          | 
|Maturities, calls, and principal repayments      |                          | 
|Net increase in loans                            |                          | 
|Purchases of premises and equipment              |                          | 
|Proceeds from sale of other real estate          |                          | 
|Net change in federal funds sold                 |                          | 
|                                                 |                          | 
|Net cash from investing activities               |                          | 
|Cash flows from financing activities:            |                          | 
|Net change in deposits                           |                          | 
|Net change in short-term FHLB advances           |                          | 
|Repayment of long-term FHLB advances             |                          | 
|Stock options exercised                          |                          | 
|Purchase of treasury stock                       |                          | 
|Dividends paid                                   |                          | 
|                                                 |                          | 
|Net cash from financing activities               |                          | 
|                                                 |                          | 
|Net change in cash and cash equivalents          |                          | 
|Cash and cash equivalents at beginning of period |                          | 
|                                                 |                          | 
|Cash and cash equivalents at end of period       |                          | 
|                                                 |                          | 
|                                                
|Supplemental disclosures:                        |                          | 
|Cash paid for income taxes                       |                          | 
|Cash paid for interest                           |                          | 
|                                                
|Significant non-cash transactions:               |                          | 
|Transfers from loans to real estate owned        |                          | 

|See accompanying Notes to Consolidated Financial Statements.


6



GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        | Three MonthsEnded June 30, |  | Six MonthsEnded June 30, |      
|------------------------------------------------------- | -------------------------- |  | ------------------------ | -----
|
|Net earnings                                            |                            |  | $                        | 1,093
|Other comprehensive income:                             |                            | 
|Unrealized gain (loss) on available for sale securities |                            | 
|arising during the period                               |                            |  |                          | 1,062
|Reclassification adjustment for amounts realized on     |                            | 
|securities sales included in net earnings               |                            |  |                          | (280 
|                                                        |                            |  |                          |      
|Net unrealized gain (loss)                              |                            |  |                          | 782  
|Tax effect                                              |                            |  |                          | (266 
|                                                        |                            |  |                          |      
|Total other comprehensive income (loss)                 |                            |  |                          | 516  
|                                                        |                            |  |                          |      
|Comprehensive income                                    |                            |  | $                        | 1,609
|                                                        |                            |  |                          |      

|See accompanying Notes to Consolidated Financial Statements.


7



GUARANTY
BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2002(UNAUDITED)


NOTE 1.      BASIS OF PRESENTATION


The
accompanying unaudited consolidated financial statements include the accounts of
Guaranty Bancshares, Inc. (the Company) and its wholly-owned
subsidiaries Guaranty (TX) Capital Trust I and Guaranty Financial Corp., Inc.,
which wholly owns Guaranty Bank, and one non-bank subsidiary, Guaranty Company.
Guaranty Bank has three wholly owned non-bank subsidiaries, Guaranty Leasing
Company, Guaranty Company and GB Com, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.


The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles in the United
States of America for a complete presentation of financial position. In the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows of the Company on a
consolidated basis, and all such adjustments are of a normal recurring nature.
These financial statements and the notes thereto should be read in conjunction
with the Companys Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 15, 2002. Except for changes implemented due to
recent accounting pronouncements as discussed below, the Company has
consistently followed the accounting policies described in the Annual Report in
preparing this Form 10-Q. Operating results for the three and six months ended
June 30, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.


In
preparation of the accompanying unaudited consolidated financial statements,
management is required to make estimates and assumptions, which are based on
information available at the time such estimates and assumptions are made. These
estimates and assumptions affect the amounts reported in the accompanying
unaudited consolidated financial statements. Accordingly, future results may
differ if the actual amounts and events are not the same as the estimates and
assumptions of management. The collectability of loans, fair value of financial
instruments and other real estate and status of contingencies are particularly
subject to change.


NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS


On
January 1, 2002, the Company adopted new accounting policies related to
goodwill, intangibles and other long-lived assets in accordance with several
recently issued accounting pronouncements. Our new accounting policies are
discussed below:


Goodwill:
On January 1, 2002, the Company stopped amortizing goodwill and adopted a
new policy for measuring goodwill for impairment. The Company has completed its
initial impairment test and no impairment of goodwill was recognized in
connection with the adoption of this new policy. Under the new policy, goodwill
is assigned to reporting units. Goodwill is then tested for impairment at least
annually, or on an interim basis if an event occurs or circumstances change that
would more-likely-than-not reduce the fair value of the reporting unit below its
carrying value. Goodwill is tested for impairment using a two-step approach. The
first step is to compare the fair value of the reporting unit to its carrying
amount, including goodwill. If the fair value of the reporting unit is greater
than its carrying amount, goodwill is not considered impaired and the second
step is not required. If the fair value of the reporting unit is less than its
carrying amount, the second step of the impairment test measures the amount of
the impairment loss, if any. The second step of the impairment test is to
compare the implied fair value of goodwill to its carrying amount. If the
carrying amount of goodwill exceeds its implied fair value, an impairment loss
is recognized equal to that excess. The implied fair value of goodwill is
calculated in the same manner that goodwill is calculated in a business
combination, whereby the fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price. The excess
purchase price over the amounts assigned to assets and liabilities
would be the implied fair value of goodwill.


8
The
following table presents reported net income and basic earnings per common share
for the three and six months ended June 30, 2001 and 2002 adjusted to exclude
goodwill amortization expense assuming the new standards were applied effective
January 1, 2001 (dollars in thousands, except per share amounts):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Three Months EndedJune 30, |  | Six Months EndedJune 30, |      
|--------------------------------- | -------------------------- |  | ------------------------ | -----
|
|
|                                  |                            |  |                          |      
|Reported net income               |                            |  | $                        | 1,093
|Add back amortization of goodwill |                            |  |                          |     
|                                  |                            |  |                          |      
|Adjusted net income               |                            |  | $                        | 1,093
|                                  |                            |  |                          |      
|                                 
|Reported earnings per share       |                            |  | $                        | 0.36 
|Goodwill amortization             |                            |  |                          |     
|                                  |                            |  |                          |      
|Adjusted earnings per share       |                            |  | $                        | 0.36 
|                                  |                            |  |                          |      

|Intangible
Assets and Other Long-Lived Assets: Intangible assets with definite useful
lives are amortized on a straight-line basis over their estimated useful life.
Intangible assets, premises and equipment and other long-lived assets are tested
for impairment whenever events or changes in circumstances indicate the carrying
amount of the assets may not be recoverable from future undiscounted cash flows.
If impaired, the assets are recorded at fair value.


The following accounting
standard was issued during the six months ended June 30, 2002:


Statement
of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 clarifies and simplifies existing accounting
pronouncements related to gains and losses from debt extinguishments and certain
lease modifications and eliminates certain transitional accounting standards
that are no longer necessary. This statement also makes minor technical
corrections to various other existing pronouncements. Certain provisions of this
statement will become effective for the Company on January 1, 2003, while
other provisions became effective for transactions occurring and financial
statements issued after May 15, 2002. Adoption of the provisions of this
statement that were effective after May 15, 2002 did not have a significant
impact on the Companys financial statements. Furthermore, adoption of the
remaining provisions of this statement on January 1, 2003 is not expected
to have a significant impact on the Companys financial statements.


9
NOTE 3. EARNINGS PER SHARE


Earnings
per share is computed in accordance with Statement of Financial Accounting
Standards No. 128, which requires dual presentation of basic and diluted
earnings per share (EPS) for entities with complex capital
structures. Basic EPS is based on net earnings divided by the weighted-average
number of shares outstanding during the period. Diluted EPS includes the
dilutive effect of stock options granted using the treasury stock method.


The
weighted-average number of common shares outstanding for basic and diluted earnings per
share computations was as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | Three MonthsEnded June 30, |  | Six MonthsEnded June 30, |          
|------------------------------------------------ | -------------------------- |  | ------------------------ | ---------
|
|
|                                                
|Weighted average common shares used in basic EPS |                            |  |                          | 2,995,307
|Dilutive effect of stock options                 |                            |  |                          | 22,920   
|                                                 |                            |  |                          |          
|Weighted average common shares used in           |                            | 
|diluted EPS                                      |                            |  |                          | 3,018,227
|                                                 |                            |  |                          |          

|NOTE 4. STOCK OPTIONS


In
2000, the Company granted nonqualified stock options to certain executive
officers of the Company and Guaranty Bank under the Companys 1998 Stock
Incentive Plan. The grants consisted of eight-year options to purchase 89,500
shares at an exercise price of $9.30 per share, which was the market price of
the Companys stock on the date the options were granted. In February 2002,
the Company granted eight-year options to purchase 20,000 shares at an exercise
price of $12.50 per share, which was the market price of the Companys
stock on the date the options were granted. The options fully vest and become
exercisable in five equal installments commencing on the first anniversary of
the date of grant and annually thereafter. At June 30, 2002, 2,000 shares of the
options have been exercised and 893,500 options remain available for future
grant under the 1998 Stock Incentive Plan.


The
weighted-average fair value per share of options granted during 2002 was $4.09.
The fair value of options granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: Dividend yield of 2.24%; expected volatility of 28.7%; risk-free
interest rate of 5.0%, and an expected life of 8.00 years.


NOTE 5. COMMITMENT AND CONTINGENCIES


In
the normal course of business, the Company enters into various transactions,
which, in accordance with generally accepted accounting principles in the United
States of America, are not included in the consolidated balance sheets. These
transactions are referred to as off-balance sheet commitments. The
Company enters into these transactions to meet the financing needs of its
customers. These transactions include commitments to extend credit and letters
of credit, which involve elements of credit risk in excess of the amounts
recognized in the consolidated balance sheets. The Company minimizes its
exposure to loss under these commitments by subjecting them to credit approval
and monitoring procedures.


10
The
Company enters into contractual commitments to extend credit, normally with
fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Companys commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan funding. Management
assesses the credit risk associated with certain commitments to extend credit in
determining the level of the allowance for credit losses.


Letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The Companys policies
generally require that letters of credit arrangements contain security and debt
covenants similar to those contained in loan agreements.


Outstanding
commitments and letters of credit are approximately as follows (dollars in
thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Contract orNotional Amount |  |                             
| | -------------------------- |  | ----------------------------
|
|
|
| |                            |  | Commitments to extend credit
| |                            |  | Letters of credit           

|The
Company is subject to various claims and legal actions occurring in the normal
course of business. The Company accrues for estimated losses in the accompanying
financial statements for those matters where management believes the likelihood
of an adverse outcome is probable and the amount of the loss is reasonably
estimable. After consultation with legal counsel, management currently believes
the outcome of outstanding legal proceedings, claims and litigation involving
the Company will not have a material adverse effect on the Companys
business, financial condition or results of operation.


Guaranty
Leasing Company, a non-bank subsidiary of the Bank, is a substantial partner in
various complex equipment leasing transactions primarily originated in 1992,
1994 and 1995 involving leveraged leases. During 2001 and 1998, Guaranty Leasing
was informed by the Internal Revenue Service (the Service) that
certain losses taken by the Partnership during 1992 and 1994 through 1996
amounting to approximately $1.7 million would be disallowed. The Partnership
plans to appeal the Services determination and to actively contest the
Services position. However, if the Service is ultimately successful in
re-determining the amount of the Partnerships taxable loss, the
Companys tax liability would be increased. Such adjustment may have a
material adverse effect on the Companys consolidated financial statements.


There
can be no assurance that the Service will not contest and ultimately disallow
similar types of deductions and losses for other open tax years by the
Partnerships in which Guaranty Leasing has ownership. If the Service is
successful in its challenge of the Partnerships losses, the potential
additional tax liability to the Company may have a material adverse effect on
its consolidated financial statements.


11



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Certain
statements in this Quarterly Report on Form 10-Q include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the Safe Harbor created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry significantly
increasing; changes in the interest rate environment reducing margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions; volatility of rate
sensitive deposits; operational risks including data processing system failures
or fraud; asset/liability, matching risks and liquidity risks; and changes in
the securities markets and the factors contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2001 as filed with the
Securities and Exchange Commission.


These
risks and uncertainties are beyond the Companys control and, in many
cases, the Company cannot predict the risks and uncertainties that could cause
its actual results to differ materially from those indicated by the
forward-looking statements. When used in this document, the words
believes, plans, expects,
anticipates, intends, continue,
may, will, should or the negative of such
terms and similar expressions as they relate to the Company, its customers or
its management are intended to identify forward-looking statements.


GENERAL OVERVIEW


Guaranty
Bancshares, Inc. (the Company) is a registered bank holding company
that derives substantially all of its revenues and income from the operation of
its subsidiary, Guaranty Bank (the Bank). The Bank is a full service
bank that provides a broad line of financial products and services to small and
medium-sized businesses and consumers through ten banking locations in the Texas
communities of Mount Pleasant (two offices), Bogata, Commerce, Deport, Paris,
Pittsburg, Sulphur Springs, Talco and Texarkana. The Company also maintains a
loan production office in Fort Stockton, Texas.


FINANCIAL OVERVIEW


Net
earnings for the six months ended June 30, 2002 were $2.1 million, or $0.69 per
share, compared with $1.5 million, or $0.48 per share, for the six months ended
June 30, 2001, an increase of $614,000 or 42.0%. The increase is due primarily
to an increase in net interest income of $1.7 million, or 26.8%, and an increase
in noninterest income of $159,000, or 6.8%, offset by an increase in noninterest
expense of $592,000, or 9.1%, an increase in provision for loan losses of
$360,000, or 105.9%, and an increase in provision for income taxes of $292,000,
or 70.7%. These increases are due in part to the growth in loans, in deposits
and in net earnings. Net earnings for the three months ended June 30, 2002 were
$1.1 million, or $0.36 per share, compared with $723,000, or $0.24 per share,
for the three months ended June 30, 2001, an increase of $370,000, or 51.2%. The
increase is primarily due to an increase in net interest income and noninterest
income and a gain on sale of securities during the quarter partially offset by
an increase in noninterest expense primarily due to additional employee
compensation and benefits cost.


The
first six months of 2002 showed steady growth. Gross loans increased to $348.0
million at June 30, 2002, from $331.3 million at December 31, 2001, an increase
of $16.7 million, or 5.0%. Total assets increased to $491.5 million at June 30,
2002, compared with $460.5 million at December 31, 2001. The increase of $31.0
million in total assets resulted primarily from the investment of increased
deposits of $19.5 million, and a net increase in FHLB advances of $9.8 million.
Total deposits increased to $402.8 million at June 30, 2002 compared to $383.3
million at December 31, 2001, an increase of $19.5 million, or 5.1%.


12
Total
shareholders equity was $33.7 million at June 30, 2002, compared with
$31.8 million at December 31, 2001, an increase of $1.9 million, or 6.0%. This
increase was due to earnings for the period of $2.1 million and an increase in
accumulated other comprehensive income of $405,000 offset by the purchase of
10,000 shares of treasury stock at a cost of $130,000, and the payment of
dividends of $450,000.


RESULTS OF OPERATIONS


Interest Income


Interest
income for the six months ended June 30, 2002 was $14.3 million, a decrease of
$835,000, or 5.5%, compared with the six months ended June 30, 2001. Despite the
increase in average interest-earning assets, interest income decreased primarily
due to lower interest rates earned on earning assets as a result of the falling
interest rate environment. The average interest rate earned on interest-earning
assets decreased from 8.02% during the six months ended June 30, 2001 to 6.66%
during the six months ended June 30, 2002. Average loans were $334.3 million for
the six months ended June 30, 2002, compared with $290.6 million for the six
months ended June 30, 2001, an increase of $43.7 million, or 15.0%. Average
securities were $84.9 million for the six months ended June 30, 2002, compared
with $68.5 million for the six months ended June 30, 2001, an increase of $16.4
million or 23.9%. Interest income for the three months ended June 30, 2002 was
$7.2 million, a decrease of $299,000, or 4.0%, compared with the three months
ended June 30, 2001. The decrease was primarily due to a decrease in the average
yield on interest-earning assets from 7.84% during the three months ended June
30, 2001 to 6.54% during the three months ended June 30, 2002.


Interest Expense


Interest
expense on deposits and other interest-bearing liabilities was $6.2 million for
the six months ended June 30, 2002, compared with $8.8 million for the six
months ended June 30, 2001, a decrease of $2.6 million, or 28.9%. The decrease
in interest expense is due primarily to a lower average rate paid on
interest-bearing liabilities, which decreased from 5.31% for the six months
ended June 30, 2001, to 3.35% for the six months ended June 30, 2002. The effect
of this decrease was partially offset by growth in the average volume of
interest-bearing liabilities. Average interest bearing deposits were $331.8
million for the six months ended June 30, 2002, compared to $317.5 million for
the six months ended June 30, 2001, an increase of $14.3 million or 4.5%.
Average Federal Home Loan Bank (FHLB) advances were $36.3 million for the six
months ended June 30, 2002 compared to $8.7 million for the six months ended
June 30, 2001, an increase of $27.6 million or 317.8%. Average long-term debt
remained at $7.0 million for both comparative periods. Interest expense was $3.1
million for the three months ended June 30, 2002, compared with $4.3 million for
the three months ended June 30, 2001, a decrease of $1.2 million, or 27.5%. The
decrease for the comparable three-month periods was also due to decreases in
average interest rates of interest-bearing liabilities offset by increases in
average balances.


Net Interest Income


Net
interest income was $8.0 million for the six months ended June 30, 2002 compared
with $6.3 million for the six months ended June 30, 2001, an increase of $1.7
million, or 26.8%. The increase in net interest income resulted primarily from
growth in average interest-earning assets to $432.3 million for the six months
ended June 30, 2002, from $379.7 million for the six months ended June 30, 2001,
an increase of $52.5 million, or 13.8%, offset by growth in average
interest-bearing liabilities to $375.1 million for the six months ended June 30,
2002, from $333.2 million for the six months ended June 30, 2001, an increase of
$41.9 million, or 12.6%. Net interest income was $4.1 million for the three
months ended June 30, 2002, compared with $3.2 million for the three months
ended June 30, 2001, an increase of $875,000, or 27.2%. The net interest margin
increased from 3.37% to 3.72% for the three months ended June 30, 2002 and from
3.36% to 3.75% for the six months ended June 30, 2002 compared to the same three
and six month periods ended June 30, 2001. These increases can be attributed to
the fact that the percentage growth in average interest-earning assets exceeded
the percentage growth in average interest-bearing liabilities causing the ratio
of average interest-earning assets to average interest-bearing liabilities to
increase.


13
The
Companys net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as a
volume change. It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a rate change. The following tables
set forth, for each category of interest-earning assets and interest-bearing
liabilities, the average amounts outstanding, the interest earned or paid on
such amounts, and the annualized average rate earned or paid for the three and
six months ended June 30, 2002 and 2001, respectively. The tables also set forth
the average rate earned on total interest-earning assets, the average rate paid
on total interest-bearing liabilities, the net interest spread and the net
interest margin for the same periods. The net interest spread is the difference
between the average rate earned on total interest-earning assets less the
average rate paid on total interest-bearing liabilities. The net interest margin
is net interest income as a percentage of average interest-earning assets.
Average balances are derived from daily average balance, which include
nonaccrual loans in the loan portfolio.


14
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended June 30,
|----------------------------------------- | ---------------------------
|
|
|
|Assets                                    |                            
|Interest-earning assets:                  |                            
|Loans                                     |                            
|Securities                                |                            
|Federal funds sold                        |                            
|Interest-bearing deposits in              |                            
|other financial institutions              |                            
|                                          |                            
|Total interest-earning assets             |                            
|                                         
|Less allowance for loan losses            |                            
|                                          |                            
|                                         
|Total interest-earning                    |                            
|assets,  net of allowance                 |                            
|Non-earning assets:                       |                            
|Cash and due from banks                   |                            
|Premises and equipment                    |                            
|Interest receivable and                   |                            
|other assets                              |                            
|Other real estate owned                   |                            
|                                          |                            
|                                         
|Total assets                              |                            
|                                          |                            
|                                         
|Liabilities and shareholders equity      |                            
|Interest-bearing liabilities:             |                            
|NOW, savings, and money                   |                            
|market accounts                           |                            
|Time deposits                             |                            
|                                          |                            
|Total interest-bearing                    |                            
|deposits                                  |                            
|FHLB advances and federal funds purchased |                            
|Long-term debt                            |                            
|                                          |                            
|Total interest-bearing                    |                            
|liabilities                               |                            
|                                          |                            
|                                         
|Noninterest-bearing liabilities:          |                            
|Demand deposits                           |                            
|Accrued interest, taxes and               |                            
|other liabilities                         |                            
|                                          |                            
|Total liabilities                         |                            
|Shareholders equity                      |                            
|                                          |                            
|                                         
|Total liabilities and                     |                            
|shareholders equity                      |                            
|                                          |                            
|Net interest income                       |                            
|                                          |                            
|                                         
|Net interest spread                       |                            
|                                          |                            
|                                         
|Net interest margin                       |                            
|                                          |                            

|15
|--

|                                          | Six Months Ended June 30,
|----------------------------------------- | -------------------------
|
|
|
|Assets                                    |                          
|Interest-earning assets:                  |                          
|Loans                                     |                          
|Securities                                |                          
|Federal funds sold                        |                          
|Interest-bearing deposits in              |                          
|other financial institutions              |                          
|                                          |                          
|Total interest-earning assets             |                          
|                                         
|Less allowance for loan losses            |                          
|                                          |                          
|                                         
|Total interest-earning                    |                          
|assets,  net of allowance                 |                          
|Non-earning assets:                       |                          
|Cash and due from banks                   |                          
|Premises and equipment                    |                          
|Interest receivable and                   |                          
|other assets                              |                          
|Other real estate owned                   |                          
|                                          |                          
|                                         
|Total assets                              |                          
|                                          |                          
|                                         
|Liabilities and shareholders equity      |                          
|Interest-bearing liabilities:             |                          
|NOW, savings, and money                   |                          
|market accounts                           |                          
|Time deposits                             |                          
|                                          |                          
|Total interest-bearing                    |                          
|deposits                                  |                          
|FHLB advances and federal funds purchased |                          
|Long-term debt                            |                          
|                                          |                          
|Total interest-bearing                    |                          
|liabilities                               |                          
|                                          |                          
|                                         
|Noninterest-bearing liabilities:          |                          
|Demand deposits                           |                          
|Accrued interest, taxes and               |                          
|other liabilities                         |                          
|                                          |                          
|Total liabilities                         |                          
|Shareholders equity                      |                          
|                                          |                          
|                                         
|Total liabilities and                     |                          
|shareholders equity                      |                          
|                                          |                          
|Net interest income                       |                          
|                                          |                          
|                                         
|Net interest spread                       |                          
|                                          |                          
|                                         
|Net interest margin                       |                          
|                                          |                          

|16
The
following tables present the dollar amount of changes in interest income and
interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguishes between the increase (decrease)
related to outstanding balances and the volatility of interest rates. For
purposes of these tables, changes attributable to both rate and volume that can
be segregated have been allocated (dollars in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Three Months Ended June 30, | 
|----------------------------------- | --------------------------- | 
|
|
|
|
|                                   
|Interest-earning assets:            |                             | 
|Loans                               |                             | 
|Securities                          |                             | 
|Federal funds sold                  |                             | 
|Interest-bearing deposits in other  |                             | 
|financial institutions              |                             | 
|                                    |                             | 
|Total change in interest income     |                             | 
|                                    |                             | 
|                                   
|Interest-bearing liabilities:       |                             | 
|NOW, savings, and money market      |                             | 
|accounts                            |                             | 
|Time deposits                       |                             | 
|FHLB advances                       |                             | 
|Long-term debt                      |                             | 
|                                    |                             | 
|Total change in interest expense    |                             | 
|                                    |                             | 
|Total change in net interest income |                             | 
|                                    |                             | 

|17
|--

|                                    | Six Months Ended June 30, | 
|----------------------------------- | ------------------------- | 
|
|
|
|
|                                   
|                                    |                           | 
|Interest-earning assets:            |                           | 
|Loans                               |                           | 
|Securities                          |                           | 
|Federal funds sold                  |                           | 
|Interest-bearing deposits in other  |                           | 
|financial institutions              |                           | 
|                                    |                           | 
|Total change in interest income     |                           | 
|                                    |                           | 
|                                   
|Interest-bearing liabilities:       |                           | 
|NOW, savings, and money market      |                           | 
|accounts                            |                           | 
|Time deposits                       |                           | 
|FHLB advances                       |                           | 
|Long-term debt                      |                           | 
|                                    |                           | 
|Total change in interest expense    |                           | 
|                                    |                           | 
|Total change in net interest income |                           | 
|                                    |                           | 

|Provision for Loan Losses


Provisions
for loan losses are charged to income to bring the total allowance for loan
losses to a level deemed appropriate by management of the Company based on such
factors as the industry diversification of the Companys commercial loan
portfolio, the effect of changes in the local real estate market on collateral
values, the results of recent regulatory examinations, the effects on the loan
portfolio of current economic indicators and their probable impact on borrowers,
the amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security, the evaluation of the Companys loan portfolio
by Independent Bank Services, L.C. and the annual examination of the
Companys financial statements by its independent auditors. The provision
for loan losses for the six months ended June 30, 2002, was $700,000 compared
with $340,000 for the six months ended June 30, 2001, an increase of $360,000,
or 105.9%. The provision for loan losses for the three months ended June 30,
2002 was $450,000 compared to $185,000 for the three months ended June 30, 2001,
an increase of $265,000, or 143.2%. The increase for the six month period was
due to the increase in average loans of $43.7 million, or 15.0% over the period.
Management believes increasing the allowance for loan losses is prudent as total
loans, particularly higher-risk commercial, construction, and consumer loans,
increase. The increase is also due to the unstable economic conditions and
interest rate environment.


Noninterest Income


The
following table presents, for the periods indicated, the major categories of noninterest
income (dollars in thousands):


18
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Three Months EndedJune 30, |  | Six Months EndedJune 30, |      
|----------------------------------- | -------------------------- |  | ------------------------ | -----
|
|
|                                   
|Service charges on deposit accounts |                            |  | $                        | 761  
|Fee income                          |                            |  |                          | 199  
|Fiduciary income                    |                            |  |                          | 38   
|Other noninterest income            |                            |  |                          | 197  
|Realized gain on securities         |                            |  |                          | 280  
|                                    |                            |  |                          |      
|Total noninterest income            |                            |  | $                        | 1,475
|                                    |                            |  |                          |      

|The
Companys primary sources of recurring noninterest income are service
charges on deposit accounts and fee income. Noninterest income for the three and
six-months period ended June 30, 2002 increased $383,000, or 35.1% and $159,000
or 6.8%, respectively, over the same periods ended June 30, 2001. The increase
in noninterest income for the three and six-month periods ended June 30, 2002
was primarily due to increases in service charges on deposit accounts created by
an increase in the number of deposit accounts and increases in fee income due to
increases in check cashing fee income and debit card fee income. The Company had
net gains on sales of securities of $317,000 for the six month period ended June
30, 2002 and the six month period ended June 30, 2001.


Noninterest Expenses


The
following table presents, for the periods indicated, the major categories of
noninterest expenses (dollars in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Three Months EndedJune 30, |  | Six Months EndedJune 30, |      
|---------------------------------- | -------------------------- |  | ------------------------ | -----
|
|
|                                  
|Employee compensation and benefits |                            |  | $                        | 2,107
|                                   |                            |  |                          |      
|Non-staff expenses:                |                            | 
|Net bank premises expense          |                            |  |                          | 486  
|Office and computer supplies       |                            |  |                          | 65   
|Legal and professional fees        |                            |  |                          | 50   
|Advertising                        |                            |  |                          | 94   
|Postage                            |                            |  |                          | 48   
|FDIC insurance                     |                            |  |                          | 16   
|Other                              |                            |  |                          | 708  
|                                   |                            |  |                          |      
|Total non-staff expenses           |                            |  |                          | 1,467
|                                   |                            |  |                          |      
|Total noninterest expenses         |                            |  | $                        | 3,574
|                                   |                            |  |                          |      

|Employee
compensation and benefits expense increased $317,000, or 17.7%, and $504,000, or
13.6%, for the three and six months ended June 30, 2002 compared to the same
periods in 2001. The increase for both the three and six month periods ended
June 30, 2002 was due primarily to normal salary increases and additional staff
placement in the Mt. Pleasant, Texarkana, and Paris locations to handle customer
growth. The number of full-time equivalent employees was 209 at June 30, 2002,
compared with 195 at June 30, 2001, an increase of 7.2%.


19
Non-staff
expenses increased $50,000, or 3.5%, and $88,000, or 3.2%, for the three and six
months ended June 30, 2002, compared with the same periods in 2001. Net bank
premises expense increased $26,000, or 5.7% and $36,000, or 3.9% over the
comparable periods due to higher building maintenance expense and increased
property tax expense. Advertising also increased during the same periods by
$25,000, or 36.2% and $24,000, or 17.0% due to additional advertising in some of
the Companys markets.


Other
non-staff expenses increased $78,000, or 12.4% and $42,000, or 3.4%, over the
comparable three and six month periods. These increases were partially the
result of increase in software support fees, ATM and debit card expenses, and
audit fees.


Income Taxes


Income
tax expense increased $292,000 to $705,000 for the six months ended June 30,
2002 from $413,000 for the same period in 2001. Income tax expense was $453,000
for the three months ended June 30, 2002 compared with $197,000 for the three
months ended June 30, 2001, an increase of $256,000. The increase for the three
and six month period is primarily attributable to the increase in income before
income taxes and also the result of fewer tax deductions available from the
Companys leveraged leasing activities. The income stated on the
consolidated statement of earnings differs from the taxable income due to
tax-exempt income, the amount of non-deductible interest expense and the amount
of other non-deductible expense.


FINANCIAL CONDITION


Loan Portfolio


Gross
loans were $348.0 million at June 30, 2002, an increase of $16.7 million, or
5.0%, from $331.3 million at December 31, 2001. Loan growth occurred primarily
in 1 4 family residential loans and in the construction and land
development loans due to good loan demand in the various markets that the
Company serves.


The
following table summarizes the loan portfolio of the Company by type of loan as
of June 30, 2002 and December 31, 2001 (dollars in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | June 30, 2002 |  | December 31, 2001 |        
|--------------------------------- | ------------- |  | ----------------- | -------
|
|
|                                 
|Commercial and industrial         |               |  | $                 | 64,096 
|Agriculture                       |               |  |                   | 8,610  
|Real estate:                      |               | 
|Construction and land development |               |  |                   | 12,229 
|1-4 family residential            |               |  |                   | 137,488
|Farmland                          |               |  |                   | 9,687  
|Non-residential and non-farmland  |               |  |                   | 73,399 
|Multi-family residential          |               |  |                   | 9,205  
|Consumer                          |               |  |                   | 33,249 
|                                  |               |  |                   |        
|Total gross loans                 |               |  | $                 | 347,963
|                                  |               |  |                   |        

|20
Allowance for Loan Losses


In
originating loans, the Company recognizes that it will experience credit losses
and the risk of loss will vary with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the quality
of the collateral for such loan. The Company maintains an allowance for loan
losses in an amount that it believes is adequate for estimated losses in its
loan portfolio. Management determines the adequacy of the allowance through its
evaluation of the loan portfolio. In addition to unallocated allowances,
specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the collateral for the loan. Loans are charged-off against the allowance for
loan losses when appropriate. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
from the assumptions used in making the initial determinations. Loan
charge-offs, net of recoveries, during the six month period ended June 30, 2002
increased $346,000 or 279.0% over the same period ended June 30, 2001. This
increase is due primarily to additional charge-offs recognized during the period
caused by the Companys aggressive position on identifying problem assets.
At June 30, 2002 and June 30, 2001, the allowance for loan losses totaled $3.6
million or 1.03% of gross loans and $2.8 million or 0.93% of gross loans
respectively. The allowance for loan losses as a percentage of nonperforming
loans was 77.69% at June 30, 2002.


Set forth
below is an analysis of the allowance for loan losses for the periods indicated
(dollars in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        | Six monthsendedJune 30,2002 |  | Six monthsendedJune 30,2001 |        
|------------------------------------------------------- | --------------------------- |  | --------------------------- | -------
|
|                                                       
|Average loans outstanding                               |                             |  | $                           | 334,330
|                                                        |                             |  |                             |        
|Gross loans outstanding at end of period                |                             |  | $                           | 347,963
|                                                        |                             |  |                             |        
|Allowance for loan losses at beginning of period        |                             |  | $                           | 3,346  
|Provision for loan losses                               |                             |  |                             | 700    
|Charge-offs:                                            |                             | 
|Commercial and industrial                               |                             |  |                             | (46    
|Real estate                                             |                             |  |                             | (358   
|Consumer                                                |                             |  |                             | (178   
|Recoveries:                                             |                             | 
|Commercial and industrial                               |                             |  |                             | 20     
|Real estate                                             |                             |  |                             | 53     
|Consumer                                                |                             |  |                             | 39     
|                                                        |                             |  |                             |        
|Net loan recoveries (charge-offs)                       |                             |  |                             | (470   
|                                                        |                             |  |                             |        
|Allowance for loan losses at end of period              |                             |  | $                           | 3,576  
|                                                        |                             |  |                             |        
|                                                       
|Ratio of allowance to end of period loans               |                             |  |                             | 1.03   
|Ratio of net charge-offs to average loans               |                             |  |                             | 0.14   
|Ratio of allowance to end of period nonperforming loans |                             |  |                             | 77.69  

|21
NONPERFORMING ASSETS


Nonperforming
assets were $6.5 million at June 30, 2002 compared with $6.2 million at December
31, 2001. Nonaccrual loans increased $198,000 from $3.7 million at December 31,
2001 to $3.9 million at June 30, 2002. This increase is due primarily to certain
commercial lines being added to non-accrual status. These lines are currently in
a liquidation mode. They have collateral values, which exceed the total debt,
and no loss is anticipated. Accruing loans 90 or more days past due decreased
$1.2 million, from $1.9 million at December 31, 2001 to $668,000 at June 30,
2002. This decrease is due primarily to collection efforts of previously past
due credits. Other real estate increased $1.3 million during the same period.
This increase is primarily the result of loans that were foreclosed on during
the period totaling $2.7 million, net of sales of properties with a carrying
value of $1.4 million. Management anticipates minimal losses on the total of
these new nonperforming assets.


The
ratio of nonperforming assets to total loans and other real estate was 1.86% and
1.87% at June 30, 2002, and December 31, 2001, respectively.


The
following table presents information regarding nonperforming assets as of the
dates indicated (dollars in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | June 30,2002 |  | December 31,2001 |      
|--------------------------------------- | ------------ |  | ---------------- | -----
|
|                                       
|Nonaccrual loans                        |              |  | $                | 3,935
|Accruing loans 90 or more days past due |              |  |                  | 668  
|                                        |              |  |                  |      
|Total nonperforming loans               |              |  |                  | 4,603
|Other real estate                       |              |  |                  | 1,896
|                                        |              |  |                  |      
|Total nonperforming assets              |              |  | $                | 6,499
|                                        |              |  |                  |      

|SECURITIES


Securities
totaled $94.7 million at June 30, 2002, an increase of $13.0 million from $81.7
million at December 31, 2001. At June 30, 2002, securities represented 19.3% of
total assets compared with 17.7% of total assets at December 31, 2001. The
average yield on securities for the six months ended June 30, 2002 was 5.44%
compared with 6.67% for the same period in 2001. At June 30, 2002, securities
included $14.8 million in U.S. Government securities, $49.1 million in
mortgage-backed securities, $27.6 million in collateralized mortgage
obligations, $2.6 million in equity securities, and $633,000 in municipal
securities. The average life of the securities portfolio at June 30, 2002, is
approximately 3.08 years, however, all of the Companys securities are
classified as available-for-sale.


OTHER ASSETS


Other
assets totaled $8.7 million at June 30, 2002 compared to $11.4 million at
December 31, 2002, a decrease of $2.7 million or 23.7%. This decrease resulted
primarily from the collection of a receivable of $3.0 million as of December 31,
2001 reflecting the settlement of the Companys lawsuit against Guaranty
Federal.


DEPOSITS


At
June 30, 2002, demand, money market and savings deposits account for
approximately 43.2% of total deposits, while certificates of deposit made up
56.8% of total deposits. Total deposits increased $19.5 million, or 5.1% from
December 31, 2001 to June 30, 2002. This increase comes primarily from an
increase in certificate of deposits of $15.2 million, or 7.1%, due to the
offering of competitive yields on these deposits, and an increase in noninterest
bearing accounts of $4.0 million, or 6.3%, due to an increase in the number of
deposit accounts. Noninterest-bearing demand deposits totaled $67.8 million, or
16.8% of total deposits, at June 30, 2002, compared with $63.7 million, or 16.6%
of total deposits, at December 31, 2001. The average cost of deposits, including
noninterest-bearing demand deposits, is 2.61% for the six months ended June 30,
2002 compared with 4.38% for the same period in 2001.


22
LIQUIDITY


The
Companys asset/liability management policy is intended to maintain
adequate liquidity for the Company. Liquidity involves the Companys
ability to raise funds to support asset growth or reduce assets to meet deposit
withdrawals and other payment obligations, to maintain reserve requirements and
otherwise to operate the Company on a continuing basis. The Companys
liquidity needs are primarily met by growth in core deposits. Although access to
purchased funds from correspondent banks is available and has been utilized on
occasion to take advantage of investment opportunities, the Company does not
continually rely on these external-funding sources. The cash and federal funds
sold position, supplemented by amortizing investments along with payments and
maturities within the loan portfolio, has historically created an adequate
liquidity position.


The
Companys cash flows are composed of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. As summarized in the unaudited condensed consolidated
statements of cash flows, the most significant transactions which affected the
Companys level of cash and cash equivalents, cash flows, and liquidity
during the first six months of 2002 were securities purchases of $47.2 million,
securities sales of $19.6 million, the net increase in deposits of $19.5
million, the net increase in loans of $19.2 million, securities call,
maturities, and principal repayments of $15.3 million, and the net increase in
short-term FHLB advances of $9.8 million.


CAPITAL RESOURCES


Both
the Board of Governors of the Federal Reserve System (Federal
Reserve), with respect to the Company, and the Federal Deposit Insurance
Corporation (FDIC), with respect to Guaranty Bank, have established
certain minimum risk-based capital standards that apply to bank holding
companies and federally insured banks, respectively. As of June 30, 2002, the
Companys Tier 1 risk-based capital, total risk-based capital and leverage
capital ratios were 11.41%, 12.47%, and 7.92%, respectively. As of June 30,
2002, the Banks risk-based capital ratios remain above the levels required
for the Bank to be designated as well capitalized by the FDIC with
Tier 1 risk-based capital, total risk-based capital and leverage capital ratios
of 11.07%, 12.12%, and 7.96%, respectively. Management is not aware of any
conditions or events subsequent to June 30, 2002 that would change the
Companys or the Banks capital category.


RECENT ACCOUNTING PRONOUNCEMENTS


As
discussed in Note 2  Recent Accounting Pronouncements in the Notes to
Consolidated Financial Statements included elsewhere in this report, the Company
implemented new accounting standards related to accounting for goodwill and
intangible assets beginning January 1, 2002. Also refer to this note for a
summary of new accounting standards issued during the six months ended June 30,
2002.




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


There
have been no material changes in the market risk information disclosed in the
Companys Form 10-K for the year ended December 31, 2001. See Form 10-K,
Item 7A, Quantitative and Qualitative Disclosures about Market Risk.


23
PART II
 OTHER INFORMATION




ITEM 1.  LEGAL PROCEEDINGS


The
Company is subject to various claims and legal actions occurring in the normal
course of business. The Company accrues for estimated losses in the accompanying
financial statements for those matters where management believes the likelihood
of an adverse outcome is probable and the amount of the loss is reasonably
estimable. After consultation with legal counsel, management currently believes
the outcome of outstanding legal proceedings, claims and litigation involving
the Company will not have a material adverse effect on the Companys
business, financial condition or results of operation.




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
|------------------------------------------------------------

| | The
Annual Meeting of shareholders was held on April 16, 2002. The following matters were
submitted for approval to the shareholders:
| | -------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | 1. |  | The
election of two Class III directors, Tyson T. Abston and Bill Priefert; four Class II
directors, Jonice Crane, C.A. Hinton, Sr., Arthur B. Scharlach, Jr., and Gene Watson with
2,402,922 votes for and 91 votes abstaining.
| |  |  |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | 2. |  | To
ratify the appointment of McGladrey & Pullen, LLP as independent auditors. 2,402,672 votes
for, 91 votes against and 250 votes abstaining.
| |  |  |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 5.  OTHER INFORMATION
|--------------------------

| | None
| | ----

|ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
|-----------------------------------------

| | (a)
The following documents are filed as part of this Quarterly Report on Form 10Q:
| | -----------------------------------------------------------------------------------

| | (1)
Exhibits The following exhibits are filed as a part of this Quarterly Report on
Form 10Q:
| | ----------------------------------------------------------------------------------------------

| | 11
Statement regarding computation of earnings per share
| | --------------------------------------------------------

| | 99
Certification of Chief Executive Officer and Chief Financial Officer
| | -----------------------------------------------------------------------

| | (b)
Reports on Form 8-K
| | -----------------------

| | No
reports on Form 8-K were filed by Guaranty Bancshares, Inc., during the three months
ended June 30, 2002.
| | ------------------------------------------------------------------------------------------------------------

|24



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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: August 12, 2002 |  | GUARANTY BANCSHARES, INC.
(Registrant)
By: /s/ Arthur B. Scharlach, Jr.

Arthur B. Scharlach, Jr.
President
(Principal Executive Officer)
|--------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: August 12, 2002 |  | By: /s/ Clifton A. Payne

Clifton A. Payne
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|25
INDEX TO
EXHIBITS
|--------------------

|ExhibitNumber |  | Description |  | Page Number
|------------- |  | ----------- |  | -----------

|11 |  | Statement regarding computation of earnings per share |  | Reference is hereby made to Note 3 of Notes to
Consolidated Financial Statements on page 10 hereof.
|-- |  | ----------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------

|99 |  | Certification of Chief Executive Officer and Chief Financial Officer |  | Page 27
|-- |  | -------------------------------------------------------------------- |  | -------

|26
|--