UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 20549

                                    FORM 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, 1999

                                        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                                           75-16516431
(State or other jurisdiction of                   (I.R.S. Employer incorporation
        or organization)                               Identification 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 10, 1999, there were 2,898,280 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
<PAGE>
                    GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                                INDEX TO FORM 10-Q


PART I - FINANCIAL INFORMATION
                                                                            PAGE
Item 1.  Financial Statements
         Consolidated Balance Sheets as of June 30, 1999 (unaudited)
           and December 31, 1998 ..............................................2
         Consolidated Statements of Earnings for the Six Months
           and Three Months Ended June 30, 1999 and 1998   (unaudited).........3
         Consolidated Statement of Changes in Shareholders' Equity.............4
         Consolidated Statements of Cash Flows for the Six Months
           Ended June 30, 1999 and 1998 (unaudited) ...........................5
         Consolidated Statements of Comprehensive Income for
           the Six Months and Three Months Ended June 30, 1999
           and 1998 (unaudited) ...............................................6
         Notes to Interim Consolidated Financial Statements....................7
Item 2.  Management's Discussion and Analysis
         of Financial Condition and Results of Operations......................9
Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........21


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings....................................................22
Item 2.  Changes in Securities and Use of Proceeds............................22
Item 3.  Defaults upon Senior Securities .....................................22
Item 4.  Submission of Matters to a Vote of Security Holders..................22
Item 5.  Other Information....................................................22
Item 6.  Exhibits and Reports on Form 8-K.....................................22
Signatures....................................................................23

                                       1
<PAGE>
                         PART I - FINANCIAL INFORMATION

                           ITEM 1. FINANCIAL STATEMENTS

                   GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)

                                                           JUNE 30,   DEC. 31,
                                                             1999       1998
                                                          ---------- ----------
                                                          (UNAUDITED)
                         ASSETS

Cash and due from banks ...............................    $ 13,501     $ 11,721
Federal funds sold ....................................      10,410       10,090
Securities:
   Available-for-sale .................................      42,025       44,305
   Held-to-maturity ...................................       7,313        7,062
                                                           --------     --------
      Total securities ................................      49,338       51,367
                                                           --------     --------
Loans, net of allowance for loan losses of $1,567 and
  $1,512 ................................................   202,085      184,374
Premises and equipment, net ...........................       7,656        7,032
Accrued interest receivable ...........................       2,443        2,331
Other assets ..........................................       6,351        5,991
                                                           --------     --------
      Total assets ....................................    $291,784     $272,906
                                                           ========     ========

         LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
 Deposits:
    Noninterest-bearing ...............................   $  53,865    $  47,360
    Interest-bearing ...................................    207,324      194,965
                                                           --------     --------
      Total deposits ..................................     261,189      242,325
                                                           --------     --------
Borrowed funds ........................................       3,841        3,980
Other liabilities .....................................       2,636        2,805
                                                           --------     --------
      Total liabilities ...............................     267,666      249,110
                                                           --------     --------
Shareholders' equity:
   Common stock .......................................       2,898        2,898
   Additional capital .................................       9,494        9,494
   Retained earnings ..................................      12,047       11,181
   Accumulated other comprehensive income .............        (205)         223
                                                           --------     --------
                                                             24,234       23,796
Less common stock held in treasury-at cost ............         116         --
                                                           --------     --------
   Total shareholders' equity .........................      24,118       23,796
                                                           --------     --------
   Total liabilities and shareholders' equity .........    $291,784     $272,906
                                                           ========     ========

      See accompanying Notes to Interim Consolidated Financial Statements.

                                       2
<PAGE>
                      GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENT OF EARNINGS
                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                     (UNAUDITED)
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED    SIX MONTHS ENDED
                                                           JUNE 30,            JUNE 30,
                                                     ------------------    ----------------
                                                        1999      1998      1999     1998
                                                     --------    -------   ------   -------
<S>                                                    <C>       <C>       <C>       <C>
Interest income:
   Loans ..........................................    $3,933    $3,549    $7,814    $6,996
   Securities .....................................       711       809     1,483     1,704
   Federal funds sold and other
     temporary investments ........................       150       203       260       342
                                                      -------    ------    ------    ------
      Total interest income .......................     4,794     4,561     9,557     9,042
Interest expense ..................................     2,345     2,237     4,618     4,469
                                                      -------    ------    ------    ------
      Net interest income .........................     2,449     2,324     4,939     4,573
        Provision for loan losses .................        70        60       175       430
                                                      -------    ------    ------    ------
      Net interest income after
        provision for loan losses .................     2,379     2,264     4,764     4,143
Noninterest income:
   Service charges ................................       435       295       840       582
   Other operating income .........................       213       171       465     1,046
   Realized gain on
     available-for-sale securities ................         7      --          12      --
                                                      -------    ------    ------    ------
      Total noninterest income ....................       655       466     1,317     1,628
                                                      -------    ------    ------    ------
Noninterest expense:
   Employee compensation and benefits .............     1,226     1,059     2,494     2,141
   Net bank premises expense ......................       333       297       642       583
   Other operating expenses .......................       738       832     1,388     1,490
                                                      -------    ------    ------    ------
      Total noninterest expenses ..................     2,297     2,188     4,524     4,214
                                                      -------    ------    ------    ------
      Earnings before income taxes ................       737       542     1,557     1,557
Provision for income taxes ........................       180        75       345       370
                                                      -------    ------    ------    ------
      Net earnings before preferred
        stock dividends ...........................       557       467     1,212     1,187
      Preferred stock dividends ...................      --          37      --          37
                                                      -------    ------    ------    ------
      Net earnings available to common shareholders   $   557    $  430    $1,212    $1,150
                                                      =======    ======    ======    ======

      Basic earnings per common share .............    $ 0.19    $ 0.15    $ 0.42    $ 0.43
                                                      =======    ======    ======    ======
      Diluted earnings per common share ...........    $ 0.19    $ 0.15    $ 0.42    $ 0.43
                                                      =======    ======    ======    ======
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.

                                       3
<PAGE>
                   GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                  ACCUMULATED
                                                                                                     OTHER                  TOTAL
                                                                                                    COMPRE-      COMMON     SHARE-
                                                       PREFERRED  COMMON  ADDITIONAL   RETAINED     HENSIVE     STOCK IN   HOLDERS'
                                                         STOCK    STOCK    CAPITAL     EARNINGS      INCOME     TREASURY    EQUITY
                                                       ---------  ------  ----------   --------   -----------   --------   --------
<S>                <C>                                 <C>        <C>     <C>          <C>        <C>           <C>        <C>
Balance at January 1, 1997 ..........................  $     827  $2,548  $    5,396   $  7,480   $        19   $    (20)  $ 16,250
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Net earnings for the year 1997 ......................         --      --          --      2,400            --         --      2,400
Accumulated other comprehensive
     income -- net change in unrealized
     gain (loss) on available-for-sale
     securities, net of tax of $114 .................         --      --          --         --           223         --        223
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Total comprehensive income ..........................         --      --          --      2,400           223         --      2,623
Sale of Treasury Stock ..............................         --      --          --         --            --         20         20
Dividends
     Preferred - $0.45 per share ....................         --      --          --        (74)           --         --        (74)
     Common - $0.22 per share .......................         --      --          --       (566)           --         --       (566)
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Balance at December 31, 1997 ........................        827   2,548       5,396      9,240           242         --     18,253
                                                       ---------  ------  ----------   --------   -----------   --------
Net earnings for the year 1998 ......................         --      --          --      2,674            --         --      2,674
Accumulated other comprehensive
     income -- net change in unrealized
     gain (loss) on available-for-sale
     securities, net of tax of $10 ..................         --      --          --         --           (19)        --        (19)
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Total comprehensive income ..........................         --      --          --      2,674           (19)        --      2,655
Purchase of Treasury Stock ..........................         --      --          --         --            --         (2)        (2)
Sale of Treasury Stock ..............................         --      --          --         --            --          2          2
Redemption of Preferred Stock .......................       (827)     --          --         --            --         --       (827)
Sale of Common Stock ................................         --     350       4,098         --            --         --      4,448
Dividends
     Preferred - $0.23 per share ....................                 --          --      - (37)           --         --        (37)
     Common - $0.24 per share .......................         --      --          --       (696)           --         --       (696)
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Balance at December 31, 1998 ........................  $      --  $2,898  $    9,494   $ 11,181   $       223   $     --   $ 23,796
                                                       =========  ======  ==========   ========   ===========   ========   ========
Net earnings for the six months
     ended June 30, 1999 ............................         --      --          --      1,212            --         --      1,212
Accumulated other comprehensive
     income -- net change in unrealized
     gain (loss) on available-for-sale
     securities, net of tax of $220 .................         --      --          --         --          (428)        --       (428)
                                                       ---------  ------  ----------   --------   -----------   --------   --------
Total comprehensive income ..........................         --      --          --      1,212          (428)        --        784
Purchase of Treasury Stock ..........................         --      --          --         --            --       (116)      (116)
Sale of Treasury Stock ..............................         --      --          --         --            --         --         --
Redemption of Preferred Stock .......................         --      --          --         --            --         --         --
Sale of Common Stock ................................         --      --          --         --            --         --         --
Dividends
     Preferred - $0.00 per share ....................         --      --          --         --            --         --         --
     Common - $0.12 per share .......................         --      --          --       (346)           --         --       (346)
                                                       ---------  ------  ----------   --------   -----------   --------   --------

Balance at June 30, 1999 (1) ........................  $      --  $2,898  $    9,494   $ 12,047   $      (205)  $   (116)  $ 24,118
                                                       =========  ======  ==========   ========   ===========   ========   ========
</TABLE>
(1) Unaudited
      See accompanying Notes to Interim Consolidated Financial Statements.

                                        4
<PAGE>
                   GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                      SIX MONTHS
                                                                                    ENDED JUNE 30,
                                                                                   ----------------
                                                                                    1999       1998
                                                                                   -------    ------
<S>                                                                                  <C>       <C>
Cash flows from operating activities:
  Net earnings ..................................................................  $ 1,212    $1,187
  Adjustments to reconcile net earnings to net cash
    provided by operating activities:
  Depreciation ..................................................................      326       272
  Amortization of premiums, net of (accretion) of discounts on securities .......      140        85
  Net realized gain on available-for-sale securities ............................      (12)     --
  Provision for loan loss .......................................................      175       430
  Gain on sale of premises, equipment and other real estate .....................      (11)      (35)
  Write down of ORE and repossessed assets ......................................     --          15
  Proceeds from sale of loans ...................................................     --       1,967
  Increase in accrued interest receivable and other assets ......................     (427)   (3,944)
  (Decrease) increase in accrued interest and other liabilities .................      (55)      696
                                                                                   -------    ------
    Net cash provided by operating activities ...................................    1,348       673
Cash flows from investing activities:
  Purchases of held-to-maturity securities ......................................   (1,253)     --
  Proceeds from sales, maturities and repayments of available-for-sale securities    9,628     7,424
  Purchases of available-for-sale securities ....................................   (8,115)   (3,408)
  Proceeds from maturities and repayments of held-to-maturity securities ........      994     4,574
  Net increase in loans .........................................................  (17,886)  (14,596)
  Purchases of premises and equipment ...........................................     (950)     (575)
  Proceeds from sale of premises, equipment and other real estate ...............       71       477
  Net increase in federal funds sold ............................................     (320)   (4,045)
                                                                                   -------    ------
    Net cash used by investing activities .......................................  (17,831)  (10,149)
Cash flows from financing activities:
  Change in deposits ............................................................   18,864     5,322
  Repayment of borrowings .......................................................     (139)     --
  Purchase of treasury stock ....................................................     (116)       (2)
  Dividends paid ................................................................     (346)     (356)
  Redemption of preferred stock .................................................     --        (827)
  Sale of common stock ..........................................................     --       4,468
                                                                                   -------    ------
     Net cash provided from financing activities ................................   18,263     8,605
                                                                                   -------    ------
     Net increase (decrease) in cash and cash equivalents .......................    1,780      (871)
Cash and cash equivalents at beginning of period ................................   11,721     9,750
                                                                                   -------    ------
Cash and cash equivalents at end of period ......................................  $13,501    $8,879
                                                                                   =======    ======
</TABLE>
            See accompanying Notes to Interim Consolidated Financial Statements.

                                       5
<PAGE>
                    GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                               (DOLLARS IN THOUSANDS)
                                     (UNAUDITED)
<TABLE>
<CAPTION>
                                                  THREE MONTHS         SIX MONTHS
                                                 ENDED JUNE 30,       ENDED JUNE 30,
                                                -----------------   -----------------
                                                 1999      1998       1999     1998
                                                -------   -------   -------   -------
<S>                                             <C>       <C>       <C>       <C>
Net Earnings .................................  $   557   $   467   $ 1,212   $ 1,187
Other comprehensive income, net of tax:
Unrealized losses on securities:
   Unrealized losses arising during the period     (261)      (15)     (428)       (7)
                                                -------   -------   -------   -------
Comprehensive income .........................  $   296   $   452   $   784   $ 1,180
                                                =======   =======   =======   =======
</TABLE>
  See accompanying Notes to Interim Consolidated Financial Statements.

                                       6
<PAGE>
                    GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
                NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

(1)      BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of Guaranty
Bancshares, Inc. ("the Company") and its wholly-owned subsidiary Guaranty
Financial Corp., Inc., which wholly owns Guaranty Bank, and one non-bank
subsidiary, Guaranty Company. Guaranty Bank has two non-bank subsidiaries,
Guaranty Leasing 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 for complete
financial statements. In the opinion of management, the 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
12, 1999. Operating results for the six month period ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.

(2)      INCOME PER COMMON SHARE

         Income per common share was computed based on the following:
<TABLE>
<CAPTION>
                                                            THREE MONTHS                  SIX MONTHS
                                                           ENDED JUNE 30,                ENDED JUNE 30,
                                                      ------------------------      ------------------------
                                                        1999           1998           1999           1998
                                                      ---------      ---------      ---------      ---------
<S>                                                   <C>            <C>            <C>            <C>
Net earnings available to common shareholders ..      $     557      $     430      $   1,212      $   1,150
Weighted average common shares used in basic EPS      2,898,280      2,898,280      2,898,280      2,664,947
Potential dilutive common shares ...............           --             --             --             --
                                                      ---------      ---------      ---------      ---------
Weighted average common and potential dilutive
  common shares used in dilutive EPS ...........      2,898,280      2,781,613      2,898,280      2,664,947
                                                      =========      =========      =========      =========

Basic earnings per common share ................      $    0.19      $    0.15      $    0.42      $    0.43
                                                      =========      =========      =========      =========
Diluted earnings per common share ..............      $    0.19      $    0.15      $    0.42      $    0.43
                                                      =========      =========      =========      =========
</TABLE>
                                       7
<PAGE>
                    GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
         NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                  JUNE 30, 1999
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

(3)        COMPREHENSIVE INCOME

           Effective January 1, 1998, the Company has adopted Financial
  Accounting Standards No. 130, Reporting Comprehensive Income, which requires
  the reporting of comprehensive income in addition to net income from
  operations. Comprehensive income is a more inclusive financial reporting
  methodology which includes disclosure of certain financial information that
  historically has not been recognized in the calculation of net earnings.

           The tax effects for components of comprehensive income are as
  follows:
<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30,
                                           --------------------------------------------------------------------
                                                         1999                                  1998
                                           --------------------------------    --------------------------------
                                            BEFORE        TAX       NET OF      BEFORE        TAX       NET OF
                                             TAX       (EXPENSE)     TAX         TAX       (EXPENSE)     TAX
                                            AMOUNT      BENEFIT     AMOUNT      AMOUNT      BENEFIT     AMOUNT
                                           --------    ---------   --------    --------    ---------   --------
<S>                                        <C>         <C>         <C>         <C>         <C>         <C>
Unrealized losses on securities
  arising during the period ............   $   (396)   $     135   $   (261)   $    (22)   $       7   $    (15)
                                           --------    ---------   --------    --------    ---------   --------
Other Comprehensive income .............   $   (396)   $     135   $   (261)   $    (22)   $       7   $    (15)
                                           ========    =========   ========    ========    =========   ========

                                                                    SIX MONTHS ENDED JUNE 30,
                                           --------------------------------------------------------------------
                                                         1999                                  1998
                                           --------------------------------    --------------------------------
                                            BEFORE        TAX       NET OF      BEFORE        TAX       NET OF
                                             TAX       (EXPENSE)     TAX         TAX       (EXPENSE)     TAX
                                            AMOUNT      BENEFIT     AMOUNT      AMOUNT      BENEFIT     AMOUNT
                                           --------    ---------   --------    --------    ---------   --------
<S>                                        <C>         <C>         <C>         <C>          <C>        <C>
Unrealized losses on securities
  arising during the period ............   $   (648)   $     220   $   (428)  $     (10)   $       3   $     (7)
                                           --------    ---------   --------    --------    ---------   --------

Other Comprehensive income .............   $   (648)   $     220   $   (428)   $    (10)   $       3   $     (7)
                                           ========    =========   ========    ========    =========   ========
</TABLE>
                                       8
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

      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 seven banking locations
in the Texas communities of Mount Pleasant (two offices), Bogata, Deport, Paris,
Talco and Texarkana. Certain of the matters discussed in this Form 10-Q,
including matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. The words "expects," "estimates," "anticipates," "intends," "plans,"
"believes," "seek," "will," "would," "should," "projected," "contemplated," and
similar expressions are intended to identify such forward-looking statements.

      The Company's actual results or experience may differ materially from the
results anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to: (i) the effects of the Internal Revenue
Service's examination regarding the Company's leveraged leasing transactions;
(ii) the effects of future economic conditions; (iii) governmental monetary and
fiscal policies, as well as legislative and regulatory changes, (iv) the risks
of changes in interest rates on the level and composition of deposits, loan
demand and the values of loan collateral, securities and interest rate
protection agreements, as well as interest rate risks; (v) the effects of
competition from other commercial banks, thrifts, mortgage banking firms,
insurance companies, money market and other mutual funds and other financial
institutions operating in the Company's market areas and elsewhere, including
competitors offering banking products and services by mail, telephone, computer
and the Internet; (vi) the failure of assumptions underlying the establishment
of reserves for loan losses and estimations of values of collateral and various
financial assets and liabilities; (vii) that technological changes, including
Year 2000 data systems compliance issues, are more difficult or expensive than
anticipated, and (viii) other uncertainties set forth in the Company's other
public reports and filings and public statements. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.

OVERVIEW

      Net earnings available to common shareholders for the six months ended
June 30, 1999, were $1.2 million or $0.42 per share compared to $1.2 million or
$0.43 per share for the six months ended June 30, 1998. The increase in net
earnings was due primarily to an increase in net interest income of $366,000 or
8.0%, a decrease in provision for loan losses of $255,000 or 59.3% offset by a
decrease in noninterest income of $311,000 or 19.1% and an increase in
noninterest expense of $310,000 or 7.4%. The variances were due in part to a
gain on sale of approximately $2.0 million in principal amount of mortgage loans
that were originally purchased in 1991 at a discount from the Resolution Trust
Corporation ("RTC") in March 1998. The Company sold the mortgage loans at par,
which resulted in a gain of $444,000, net of $230,000 in taxes expensed as a
result of the sale. The Company did not have a gain from the sale of loans in
the first six months of 1999. The gain on the sale of loans in 1998 was
partially offset by an additional provision for loan losses of $340,000 in March
of 1998. Net earnings available to common shareholders for the three months
ended June 30, 1999 were $557,000 or $0.19 per share compared to $430,000 or
$0.15 per share for the three months ended June 30, 1998, a 29.5% increase.

                                       9
<PAGE>
      The six-month period ended June 30, 1999 showed steady growth. Total loans
increased to $203.7 million at June 30, 1999, from $185.9 million at December
31, 1998, an increase of $17.8 million or 9.6%. Total assets were $291.8 million
at June 30, 1999, compared with $272.9 million at December 31, 1998. The
increase of $18.9 million in total assets resulted primarily from an increase in
total deposits to $261.2 million at June 30, 1999, from $242.3 million at
December 31, 1998, an increase of $18.9 million or 7.8%, and an increase in
shareholders equity of $322,000. Common shareholders' equity was $24.1 million
at June 30, 1999, compared with $23.8 million at December 31, 1998, an increase
of $322,000 or 1.4%. This increase was due to net earnings for the period of
$1.2 million less a decrease in accumulated other comprehensive income of
$428,000, dividends paid on common stock of $346,000 and the purchase of
treasury stock of $116,000.

      On April 23, 1999 the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with First American Financial
Corporation ("First American") whereby First American will merge into the
Company (the "Merger"). First American, headquartered in Sulphur Springs, Texas,
is the parent company for First American Bank, N.A. and First American Mortgage
Company and operates banks in the communities of Sulphur Springs and Commerce,
Texas. The Merger Agreement, which is subject to the approval of the
shareholders of First American and various regulatory authorities, provides for
aggregate consideration of $6.9 million in the Company's Common Stock and cash
in exchange for all of the outstanding shares of First American's stock. A total
of 351,750 shares of the Company's Common Stock will be issued in the
transaction. The directors, executive officers and principal shareholders of
First American who hold a total of 82.89% of the outstanding shares of First
American have signed a Consent to Merger and Irrevocable Proxy pursuant to which
these shareholders have granted a proxy to a director of First American with
instructions to vote their shares in favor of the Merger. Therefore, it is
expected that the Merger will be approved by the shareholders of First American.
It is anticipated that the transaction will be consummated during the third
quarter of 1999. At June 30, 1999, First American had $61.6 million in total
assets, $38.7 million in loans and $56.9 million in deposits.

RESULTS OF OPERATIONS

INTEREST INCOME

      Interest income for the six months ended June 30, 1999, was $9.6 million,
an increase of $515,000 or 5.7% from the six months ended June 30, 1998. The
increase in interest income was due primarily to higher interest income on
loans. Average loans were $194.6 million for the six months ended June 30, 1999,
compared with $162.1 million for the six months ended June 30, 1998, an increase
of $32.5 million or 20.0%. Internal growth accounted for all of the $32.5
million increase in average loans. Average securities were $49.4 million for the
six months ended June 30, 1999, compared with $52.7 million for the six months
ended June 30, 1998, a decrease of $3.3 million or 6.3%. Interest income for the
three months ended June 30, 1999 was $4.8 million, an increase of $233,000 or
5.1% from the three months ended June 30, 1998.

INTEREST EXPENSE

      Interest expense on deposits and other interest-bearing liabilities was
$4.6 million for the six months ended June 30, 1999, compared with $4.5 million
for the six months ended June 30, 1998, an increase of $149,000 or 3.3%. The
increase in interest expense was due primarily to an increase in average
interest-bearing liabilities, to $208.1 million for the six months ended June
30, 1999, from $182.2 million

                                       10
<PAGE>
for the six months ended June 30, 1998, an increase of $25.9 million or 14.2%.
The increase is mitigated by a decrease in average interest rates from 4.97% for
the first six months in 1998 to 4.50% for the first six months in 1999. Interest
expense was $2.3 million for the three months ended June 30, 1999, compared with
$2.2 million for the three months ended June 30, 1998, an increase of $108,000
or 4.8%.


NET INTEREST INCOME

      Net interest income was $4.9 million for the six months ended June 30,
1999, compared with $4.6 million for the six months ended June 30, 1998, an
increase of $366,000 or 8.0%. The increase in net interest income resulted
primarily from growth in average earning assets to $254.7 million for the six
months ended June 30, 1999, from $226.2 million for the six months ended June 30
1998, an increase of $28.5 million or 12.6%. Net interest income was $2.4
million for the three months ended June 30, 1999, compared with $2.3 million for
the three months ended June 30, 1998, an increase of $125,000 or 5.4%.

      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 table sets 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 average rate earned or paid for the six months ended June 30, 1999 and
1998. The table also sets forth the average rate earned on total
interest-earning assets, the average rate paid on total interest-bearing
liabilities, and the net interest margin on average total interest-earning
assets for the same periods.

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED JUNE 30,
                                                              ---------------------------------------------------------------------
                                                                              1999                              1998
                                                              ----------------------------------  ---------------------------------
                                                                AVERAGE     INTEREST     AVERAGE    AVERAGE     INTEREST   AVERAGE
                                                              OUTSTANDING    EARNED/      YIELD/  OUTSTANDING    EARNED/    YIELD/
                                                                BALANCE       PAID        RATE      BALANCE       PAID       RATE
                                                              -----------   --------   ---------  -----------   --------   --------
                                                                                         (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>             <C>   <C>           <C>            <C>
ASSETS
Interest-earning assets:
  Loans
    Commercial and industrial .............................   $    59,671   $  2,378        8.08% $    45,423   $  1,903       8.50%
    Real estate-mortgage and construction .................       113,813      4,448        7.92       95,055      4,032       8.60
    Installment and other .................................        21,117        988        9.49       21,600      1,061       9.96
  Securities ..............................................        49,396      1,483        6.09       52,685      1,704       6.56
  Federal funds sold ......................................         8,714        207        4.82       11,391        342       6.09
  Interest-bearing deposits in other
    financial institutions ................................         1,980         53        5.43           --         --         --
                                                              -----------   --------   ---------  -----------   --------   --------
    Total interest-earning assets .........................       254,691   $  9,557        7.61%     226,154   $  9,042       8.11%

Less allowance for loan losses ............................        (1,528)                             (1,321)
                                                              -----------                         -----------
    Total interest-earning assets,
      net of allowance ....................................       253,163                             224,833

Non-earning assets:
   Cash and due from banks ................................         8,940                               8,576
   Premises and equipment .................................         7,568                               6,394
   Interest receivable and other assets ...................         9,329                               7,436
Other real estate owned ...................................           134                                 670
                                                              -----------                         -----------
     Total assets .........................................   $   279,134                         $   247,909
                                                              ===========                         ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:
  NOW, savings, and money market
    accounts ..............................................   $    66,932   $  1,069        3.24% $    58,246   $  1,025       3.57%
  Time deposits ...........................................       137,217      3,445        5.09      123,988      3,444       5.63
                                                              -----------   --------   ---------  -----------   --------   --------
    Total interest-bearing deposits .......................       204,149      4,514        4.48      182,234      4,469       4.97
  Other borrowed funds ....................................         3,933        104        5.36           --         --         --
                                                              -----------   --------   ---------  -----------   --------   --------
    Total interest-bearing liabilities ....................       208,082   $  4,618        4.50%     182,234   $  4,469       4.97%
                                                                            --------   ---------                --------   --------
Noninterest-bearing liabilities:
  Demand deposits .........................................        44,085                              42,944
  Accrued interest, taxes and other
    liabilities ...........................................         2,631                               2,633
                                                              -----------                         -----------
    Total liabilities .....................................       254,798                             227,811

Shareholders' equity ......................................        24,336                              20,098
                                                              -----------                         -----------
    Total liabilities and shareholders' equity ............   $   279,134                         $   247,909
                                                              ===========                         ===========
Net interest income .......................................                 $  4,939                            $  4,573
                                                                            ========                            ========
Net interest spread .......................................                                 3.11%                              3.14%
                                                                                       =========                           ========
Net interest margin .......................................                                 3.93%                              4.10%
                                                                                       =========                           ========
</TABLE>
                                       12
<PAGE>
      The following table presents 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 this table, changes attributable to both rate and volume which
can be segregated have been allocated.

                                                      SIX MONTHS ENDED JUNE 30,
                                                      -------------------------
                                                            1999 VS. 1998
                                                      -------------------------
                                                      INCREASE (DECREASE)
                                                           DUE TO
                                                      -------------------
                                                      VOLUME     RATE     TOTAL
                                                      -------    -----    -----
                                                       (DOLLARS IN THOUSANDS)
Interest-earning assets:
   Loans ..........................................   $ 1,404    $(586)   $ 818
   Securities .....................................      (106)    (115)    (221)
   Federal funds sold .............................       (80)     (55)    (135)
   Interest-bearing deposits in other
      financial institutions ......................        53     --         53
                                                      -------    -----    -----
        Total increase (decrease) in interest
          income ..................................     1,271     (756)     515
                                                      -------    -----    -----
Interest-bearing liabilities:
   NOW, savings, and money market
      accounts ....................................       153     (109)      44
   Time deposits ..................................       367     (366)       1
   Other borrowed funds ...........................       104     --        104
                                                      -------    -----    -----
        Total increase (decrease) in interest
          expense .................................       624     (475)     149
                                                      -------    -----    -----
   Increase (decrease) in net interest income .....   $   647    $(281)   $ 366
                                                      =======    =====    =====

                                       13
<PAGE>
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 historical experience, the volume and type of
lending conducted by the Company, the amount of nonperforming assets, regulatory
policies, generally accepted accounting principles, general economic conditions,
and other factors related to the collectibility of loans in the Company's
portfolio.

      The provision for loan losses for the six months ended June 30, 1999, was
$175,000 compared with $430,000 for the six months ended June 30, 1998. The 1998
provision included an extraordinary charge to the provision of $340,000 done in
order to get the reserve for loan losses to a level management believed to be
adequate based on loan growth, loan quality, prior charge-off experience and
local economic conditions. The provision for the first six months of 1999 is
deemed adequate by management based on a continued low net loan charge-off to
average loans ratio of 0.06% as of June 30, 1999, and a low nonperforming assets
to total loans and other real estate ratio of 0.77% as of June 30, 1999. For the
six months ended June 30, 1999, net charge-offs were $120,000. The provision for
loan losses for the three months ended June 30, 1999, was $70,000 compared with
$60,000 for the three months ended June 30, 1998.

NONINTEREST INCOME

      The Company's primary sources of recurring noninterest income are service
charges on deposit accounts and fee income. Excluding a $674,000 nonrecurring
gain from the sale of loans in March 1998, noninterest income for the six months
ended June 30, 1999 increased to $1.3 million from $954,000 for the six months
ended June 30, 1998, an increase of $363,000 or 38.1%. The gain on sale of loans
was recorded in March 1998, when the Company sold approximately $2.0 million of
loans originally purchased at a discount in June 1991 from the RTC. Noninterest
income was $655,000 for the three months ended June 30, 1999 compared to
$466,000 for the three months ended June 30, 1998, an increase of $189,000 or
40.6%. The following table presents, for the periods indicated, the major
categories of noninterest income:



                                     THREE MONTHS ENDED       SIX MONTHS ENDED
                                          JUNE 30,                 JUNE 30,
                                     ------------------      ------------------
                                      1999      1998           1999      1998
                                     ------- ----------      --------  --------
                                             (DOLLARS IN THOUSANDS)
Service charges on deposit
  accounts......................     $   435    $   295      $    840  $    582
Fee income......................         114        101           231       254
Fiduciary income................          13          7            30        23
Gain on sale of loans ..........           -          -             -       674
Other noninterest income........          86         63           204        95
Realized gain on securities.....           7          -            12         -
                                     -------    -------      --------  --------
    Total noninterest income....     $   655    $   466      $  1,317  $  1,628
                                     =======    =======      ========  ========

                                       14
<PAGE>
      After excluding the nonrecurring gain on the sale of loans, the increase
in noninterest income for the six months ended June 30, 1998 compared with the
six months ended June 30, 1999, resulted primarily from an increase in service
charges on deposit accounts due to an increase in the number of deposit
accounts. Additionally, other noninterest income increased $109,000 primarily
due to earnings generated from key man life insurance policies that were
purchased in July 1998.

NONINTEREST EXPENSES

      Noninterest expenses totaled $4.5 million for the six months ended June
30, 1999 compared with $4.2 million for the six months ended June 30, 1998, an
increase of $310,000 or 7.4%. Noninterest expense totaled $2.3 million for the
three months ended June 30, 1999 compared with $2.2 million for the three months
ended June 30, 1998, an increase of $109,000 or 5.0%. The following table
presents, for the periods indicated, the major categories of noninterest
expenses:


                                         THREE MONTHS ENDED    SIX MONTHS ENDED
                                              JUNE 30,             JUNE 30,
                                         ------------------  -------------------
                                           1999      1998      1999       1998
                                         --------  --------  --------   --------
                                                  (DOLLARS IN THOUSANDS)

Employee compensation and benefits ...   $  1,226     1,059  $  2,494   $  2,141
                                         --------  --------  --------   --------
Non-staff expenses:
   Net bank premises expense .........        333       297       642        583
   Office and computer supplies ......         94        71       145        131
   Legal and professional fees .......        126        86       227        188
   Advertising .......................         47        79        89        132
   Postage ...........................         33        36        67         67
   FDIC insurance ....................          6         7        13         13
   Other .............................        432       553       847        959
                                         --------  --------  --------   --------
      Total non-staff expenses .......      1,071     1,129     2,030      2,073
                                         --------  --------  --------   --------
      Total noninterest expenses .....   $  2,297  $  2,188  $  4,524   $  4,214
                                         ========  ========  ========   ========

      Employee compensation and benefits expense for the six months ended June
30, 1999, was $2.5 million, an increase of $353,000 or 16.5% over $2.1 million
for the same period in 1998. The increase was due primarily to normal salary
increases and additional staff placement in the Texarkana, Mt. Pleasant, Paris
and recently opened Pittsburg locations to handle customer growth. The number of
full-time equivalent employees was 146.0 at June 30, 1999, compared with 132.0
at June 30, 1998, an increase of 10.6%.

      Non-staff expenses were $2.0 million for the six months ended June 30,
1999, compared with $2.1 million for the same period in 1998, a decrease of
$43,000 or 2.1%. Net bank premises expense increased $59,000 or 10.1% to
$642,000.

      Other non-staff expenses include director fees, insurance, franchise tax,
telephone expense and other miscellaneous expenses, the combination of which
decreased $112,000 or 11.7% to $847,000 for the six months ended June 30, 1999.

                                       15
<PAGE>
INCOME TAXES

      Income tax expense decreased approximately $25,000 to $345,000 for the six
months ended June 30, 1999 from $370,000 for the same period in 1998. The
decrease was primarily attributable to a decrease in taxable income in 1999 over
1998. In addition, the Company recorded a gain on sale of loans of $674,000
during the first three months of 1998 creating an additional tax expense in
1998. The Company did not have a gain from the sale of loans in 1999. The income
amount stated on the consolidated statement of earnings will differ from the
taxable income due to tax-exempt income, the amount of non-deductible interest
expense and the amount of other non-deductible expense. Income tax expense was
$180,000 for the three months ended June 30, 1999 compared with $75,000 for the
three months ended June 30, 1998. The increase is primarily a result of fewer
taxable deductions available from the Company's leveraged leasing activities.

FINANCIAL CONDITION

LOAN PORTFOLIO

      Total loans were $203.7 million at June 30, 1999, an increase of $17.8
million or 9.6% from $185.9 million at December 31, 1998. Loan growth occurred
primarily in 1 to 4 family residential loans, commercial mortgage loans and
commercial loans. Loans comprised 76.7% of total earning assets at June 30, 1999
compared with 74.5% at December 31, 1998.

         The following table summarizes the loan portfolio of the Company by
type of loan as of June 30, 1999, and December 31, 1998:


                                             JUNE 30, 1999     DECEMBER 31, 1998
                                          ------------------  ------------------
                                           AMOUNT    PERCENT   AMOUNT    PERCENT
                                          --------   -------  --------   -------
                                                   (DOLLARS IN THOUSANDS)
Commercial and industrial ..............  $ 61,097     30.00% $ 59,241    31.86%
Real estate:
      Construction and land development      4,018      1.97     3,130      1.68
      1-4 family residential ...........    60,746     29.83    48,376     26.02
      Commercial mortgages .............    48,057     23.60    47,977     25.81
      Farmland .........................     7,597      3.73     7,258      3.90
      Multi-family residential .........     3,024      1.48       844      0.45
Consumer ...............................    19,113      9.39    19,060     10.28
                                          --------   -------  --------   -------

           Total loans .................  $203,652    100.00% $185,886   100.00%
                                          ========   =======  ========   =======
ALLOWANCE FOR LOAN LOSSES

      In originating loans, the Company recognizes that credit losses will be
experienced 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 based upon, among other things, historical experience, the
volume and type of lending conducted by the Company, the amount of nonperforming
assets, regulatory policies, generally accepted accounting principles, general
economic conditions, and other factors related to the collectibility of loans in
the Company's 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.

                                       16
<PAGE>
      Management actively monitors the Company's asset quality and provides
specific loss allowances when necessary. 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. As of June 30, 1999, the allowance for loan losses amounted to
$1.6 million or 0.77% of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 106.31% at June 30, 1999.

Set forth below is an analysis of the allowance for loan losses as of June 30,
1999:


                                                              JUNE 30, 1999
                                                          ----------------------
                                                          (DOLLARS IN THOUSANDS)

Average loans outstanding ................................       $ 194,601
                                                                 ---------
Gross loans outstanding at end of period .................       $ 203,652
                                                                 ---------
Allowance for loan losses at beginning of period .........           1,512
Provision for loan losses ................................             175
Charge-offs:
          Commercial and industrial ......................             (29)
          Real estate ....................................              --
          Consumer .......................................            (124)
Recoveries:
          Commercial and industrial ......................              13
          Real estate ....................................               2
          Consumer .......................................              18
                                                                 ---------
Net loan (charge-offs) recoveries ........................            (120)
Allowance for loan losses at end of period ...............        $  1,567
                                                                 =========
Ratio of allowance to end of period loans ................            0.77%
Ratio of net charge-offs to average loans ................            0.06%
Ratio of allowance to end of period nonperforming loans ..          106.31%

                                       17
<PAGE>
NONPERFORMING ASSETS

      Nonperforming assets were $1.6 million at June 30, 1999 compared with $1.3
million at December 31, 1998, reflecting continued strong asset quality. The
ratio of nonperforming assets to total loans and other real estate was 0.77% and
0.67% at June 30, 1999, and December 31, 1998, respectively.

      The following table presents information regarding nonperforming assets as
of the dates indicated:

                                                          JUNE 30,  DECEMBER 31,
                                                            1999        1998
                                                         ---------- ------------
                                                          (DOLLARS IN THOUSANDS)
Nonaccrual loans .....................................   $      978 $        290
Accruing loans 90 or more days past due ..............          496          866
                                                         ---------- ------------
          Total nonperforming loans ..................        1,474        1,156
Other real estate ....................................          104           97
                                                         ---------- ------------
          Total nonperforming assets .................   $    1,578 $      1,253
                                                         ========== ============

SECURITIES

      Securities totaled $49.3 million at June 30, 1999, a decline of $2.1
million from $51.4 million at December 31, 1998. The decline occurred as
maturing securities were used to fund loans. At June 30, 1999, securities
represented 16.9% of total assets compared with 18.8% of total assets at
December 31, 1998. The yield on average securities for the six months ended June
30, 1999, was 6.09% compared with 6.56% for the same period in 1998. At June 30,
1999, securities included $100,000 in U.S. Treasury securities, $26.0 million in
U.S. Government securities, $19.3 million in mortgage-backed securities, $1.1
million in equity securities and $2.9 million in municipal securities. The
average life of the securities portfolio at June 30, 1999, was approximately
three years.

PREMISES AND EQUIPMENT

      Premises and equipment totaled $7.7 million at June 30, 1999 and $7.0
million at December 31, 1998. The net change shows an increase of $624,000 or
8.9%, in fixed assets. The increase is primarily due to the opening of a full
service bank in Pittsburg, Texas and purchase of additional land in Paris for
future bank expansion.

OTHER ASSETS

      On July 1, 1998, the Company invested $3.1 million in single insurance
premium policies. Such policies insured the lives of certain key senior
officers. As of June 30, 1999, the net surrender values of these policies
totaled $3.3 million.

                                       18
<PAGE>
DEPOSITS

      At June 30, 1999, demand, money market and savings deposits accounted for
approximately 46.8% of total deposits, while certificates of deposit made up
53.2% of total deposits. Noninterest-bearing demand deposits totaled $53.9
million or 20.6% of total deposits at June 30, 1999, compared with $47.4 million
or 19.5% of total deposits at December 31, 1998. The average cost of deposits,
including noninterest-bearing demand deposits, was 3.69% for the six months
ended June 30, 1999 compared with 4.02% for the same period in 1998. The
decrease in the average cost of deposits was primarily due to the lower interest
rate environment during the first six months in 1999 compared to the same period
in 1998.

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 an ongoing 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 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. Net cash provided by operating activities was $1.3
million and $673,000 for the six months ended June 30, 1999 and 1998,
respectively. The increase was due primarily to the salary retention premiums
paid on executive officers of $3.0 million in the first six months of 1998
offset by the proceeds from the sale of loans of $2.0 million during the same
period. The Company did not have any sale of loans or retention premiums paid on
executive officers in the first six months of 1999.

      Net cash (used) by investing activities was $(17.8) million and $(10.1)
million for the six months ended June 30, 1999 and 1998, respectively. During
the six months ended June 30, 1999, the Company funded more loans and purchased
more investment securities than it did in the six months ended June 30, 1998.

      Net cash provided by financing activities was $18.3 million and $8.6
million for the six months ended June 30, 1999 and 1998, respectively. The
difference was due primarily to a larger net increase in deposits of $18.9 in
1999 as compared to a net increase of $5.3 million in 1998.

CAPITAL RESOURCES

      Total shareholders' equity as of June 30, 1999, was $24.1 million, an
increase of $322,000 or 1.4% compared with shareholders' equity of $23.8 million
at December 31, 1998. The increase was due to net earnings for the period of
$1.2 million offset by the decrease in accumulated other comprehensive income of
$428,000, dividends paid on common stock of $346,000 and the purchase of
treasury stock of $116,000.

      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 the Bank, have established certain minimum
risk-based capital standards that apply to bank holding companies and federally
insured banks, respectively. The Company's risk-based capital ratios remain
above the levels required for the Company to be designated as "well capitalized"
on June 30, 1999, with Tier 1 capital, total risk-based capital and leverage

                                       19
<PAGE>
capital ratios of 11.57%, 12.33% and 8.56%, respectively. The Bank's risk-based
capital ratios remain above the levels required for the Bank to be designated as
"well capitalized" on June 30, 1999, with Tier-1 capital, total risk-based
capital and leverage capital ratios of 11.03%, 11.79% and 8.16%, respectively.

YEAR 2000 COMPLIANCE

      GENERAL The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999, to January 1, 2000, computer applications that rely on the date field
could fail or create erroneous results. Such erroneous results could affect
interest, payment or due dates or cause the temporary inability to process
transactions, send invoices or engage in similar normal business activities. If
these issues are not addressed by the Company, its suppliers and its borrowers,
there could be a material adverse impact on the Company's financial condition or
results of operations.

      STATE OF READINESS The Company formally initiated its Year 2000 project
and plan in August 1997 to insure that its operational and financial systems
will not be adversely affected by Year 2000 problems. The Company has formed a
Year 2000 project team, and the Board of Directors and management are supporting
all compliance efforts and allocating the necessary resources to ensure
completion. An inventory of all systems and products (including both information
technology ("IT") and non-informational technology ("non-IT") systems) that
could be affected by the Year 2000 date change has been developed, verified and
categorized as to their importance to the Company and an assessment of all
mission critical IT and mission critical non-IT systems has been completed. This
assessment involved inputting test data which simulates the Year 2000 date
change into such IT systems and reviewing the system output for accuracy. The
Company's assessment of mission critical non-IT systems involved reviewing such
systems to determine whether they were date dependent. Based on such assessment,
the Company believes that none of its mission critical non-IT systems are date
dependent. The software for the Company's systems is provided through service
bureaus and software vendors. The Company has contacted all of its third party
vendors and software providers and is requiring them to demonstrate and
represent that the products provided are or will be Year 2000 compliant and has
planned a program of testing compliance. The Company's item processing software
provider, which performs substantially all of the Company's data processing
functions, has stated that its software is Year 2000 compliant and the Company
has tested the hardware and software to verify these assertions. In addition,
the Company's compliance efforts regarding Year 2000 issues were reviewed by the
FDIC in January 1999.

      Except as discussed above, the Company has completed the following phases
of its Year 2000 plan: (i) recognizing Year 2000 issues and (ii) assessing the
impact of Year 2000 issues on the Company's mission critical systems. The
Company is in the process of upgrading, testing and implementing the
mission-critical systems for Year 2000 compliance.

      COSTS OF COMPLIANCE Management does not expect that the cost of bringing
the Company's systems into Year 2000 compliance will have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
The Company has budgeted $50,000 to address Year 2000 issues. As of June 30,
1999, the Company has not incurred any significant costs in relation to Year
2000. The largest potential risk to the Company concerning Year 2000 is the
malfunction of its data processing system. In the event its data processing
system does not function properly, the Company is prepared to perform functions
manually. The Company believes it is in compliance with regulatory guidelines
regarding Year 2000 compliance, including the timetable for achieving
compliance.

      RISKS RELATED TO THIRD PARTIES The impact of Year 2000 noncompliance by
third parties with which the Company transacts business cannot be accurately
gauged. The Company identified its largest dollar depositors (aggregate deposits
over $100,000) and loan customers ($150,000 or more) and, based on information

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available to the Company, conducted a preliminary evaluation to determine which
of those customers are likely to be affected by Year 2000 issues. In addition,
corporate borrowers have been contacted and assessed by their respective lending
officers and scored on a scale of one, two or three, with three being the least
affected by Year 2000 issues. A corporate borrower which received a rating of
one or two was subsequently contacted to assess Year 2000 readiness efforts. To
the extent a problem is identified with respect to a customer, the Company
intends to monitor the customer's progress in resolving such problem. In the
event that Year 2000 noncompliance adversely affects borrowers, the Company may
be required to charge-off the loan to such borrowers. For a discussion of
possible effects of such charge-offs, see "Contingency Plans" below. In the
event that Year 2000 noncompliance causes depositors to withdraw funds, the
Company plans to maintain additional cash on hand. The Company relies on the
Federal Reserve for electronic fund transfers and check clearing and understands
that the Federal Reserve has certified its systems to be Year 2000 compliant and
continues to test product upgrades. With respect to its borrowers, the Company
includes in its loan documents a Year 2000 disclosure form and an addendum to
the loan agreement in which the borrower represents and warrants its Year 2000
compliance to the Company.

      CONTINGENCY PLANS The Company has completed contingency plans for each
mission critical system and contingency plans for the Company's core business
processes with respect to the Year 2000 date change. The Company believes that
any mission critical system could be recovered and operating within three to
five days. In the event that the Federal Reserve is unable to handle electronic
funds transfers and check clearing, the Company does not expect the impact to be
material to its financial condition or results of operations as long as the
Company is able to utilize an alternative funds transfer and clearing source. As
part of its contingency planning, the Company has reviewed its loan customer
base and the potential impact on capital of Year 2000 noncompliance. Based upon
such review, using what it considers to be a reasonable worst case scenario, the
Company has assumed that certain of its commercial borrowers whose businesses
are most likely to be affected by Year 2000 noncompliance would be unable to
repay their loans, resulting in charge-offs of loan amounts in excess of
collateral values. If such were the case, the Company believes that it is
unlikely that its exposure would exceed $100,000, although there are no
assurances that this amount will not be substantially higher. Management does
not believe that this amount is material enough for the Company to adjust its
current methodology for making provisions to the allowance for loan losses. In
addition, the Company plans to maintain additional cash on hand to meet any
unusual deposit withdrawal activity.

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, 1998. See
Form 10-K, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Sensitivity and Liquidity."

                                       21
<PAGE>
                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Not applicable

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         (a)  Not applicable

         (b)  Not applicable

         (c)  Not applicable

         (d)  Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   The Company's Annual Meeting of Shareholders was held on April 20, 1999.
At the meeting, the shareholders of the Company considered and acted upon the
proposals listed below.

1. Jonice Crane, C. A. Hinton, Sr., and Arthur B. Scharlach, Jr. were elected as
   Class II directors to serve until the 2002 Annual Meeting of Shareholders and
   until their successors are duly elected and qualified. A total of 2,150,939
   shares were voted in favor of each Class II director and 3,700 shares were
   withheld from voting for each Class II director.

   The other directors whose term of office as a director continued after the
   meeting included John A. Conroy, Bill G. Jones, Russell L. Jones, Weldon
   Miller, Clifton A. Payne, and D. R. Zachry, Jr.

2. The shareholders ratified the appointment of Arnold, Walker, Arnold & Co.,
   P.C. as the independent auditors of the books and accounts of the Company for
   the year ending December 31, 1999. A total of 2,136,423 shares were voted in
   favor of the proposal and 15,136 shares abstained from voting on the
   proposal.


ITEM 5.  OTHER INFORMATION

         Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) The following exhibit is filed with this report:

              Exhibit 27.   Financial Data Schedule

         (b) Reports on Form 8-K.

             On May 11, 1999, the Company filed a current report on
             Form 8-K including a press release under Item 5 of Form
             8-K. The press release announced the receipt of
             regulatory approval to open a full-service banking
             facility in Pittsburg, Texas.

             On May 17, 1999, the Company filed a current report on
             Form 8-K including a press release under Item 5 of Form
             8-K. The press release announced the execution of the
             definitive agreement to acquire First American
             Financial Corporation.

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<PAGE>
                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                            GUARANTY BANCSHARES, INC.
                                  (Registrant)

Date:  August 16, 1999                   By: /s/ ARTHUR B. SCHARLACH
                                                 Arthur B. Scharlach
                                                 President
                                                 (Principal Executive Officer)

Date:  August 16, 1999                   By: /s/ CLIFTON A. PAYNE
                                                 Clifton A. Payne
                                                 Senior Vice President and Chief
                                                 Financial Officer
                                                 (Principal Financial Officer)

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