|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 MARCH 31, 2003.


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 of
incorporation or organization) | 75-16516431
(I.R.S. Employer
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


Indicate by check mark whether the
registrant is an accelerated filer (as defined in rule 126-2 of the Exchange Act).     |_| Yes     |X|  No


As of May 10, 2003, there were
2,921,928 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 | 10
|                               | Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                            | 20
|                               | Item 4.    | Controls and Procedures                                                               | 20
|PART II  OTHER INFORMATION   
|                               | Item 1.    | Legal Proceedings                                                                     | 21
|                               | Item 2.    | Changes in Securities and Use of Proceeds                                             | 21
|                               | Item 3.    | Defaults upon Senior Securities                                                       | 21
|                               | Item 4.    | Submission of Matters to a Vote of Security Holders                                   | 21
|                               | Item 5.    | Other Information                                                                     | 21
|                               | Item 6.    | Exhibits and Reports on Form 8-K                                                      | 21
|                               | Signatures | 22                                                                                   

|2
|-

|PART I 
FINANCIAL INFORMATION


ITEM 1. FINANCIAL
STATEMENTS
GUARANTY BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(EXCEPT SHARE AMOUNTS)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                      | March 31,
      2003 |  | December
      31,
      2002
|--------------------------------------------------------------------- | -------------------- |  | -----------------------------
|
|ASSETS                                                                |                      |  |                              
|Cash and
      due from banks                                         |                      |  | $                            
|Federal funds
      sold                                              |                      |  |                              
|Securities
      available-for-sale                                   |                      |  |                              
|Loans held
      for sale                                             |                      |  |                              
|Loans, net
      of allowance for loan losses of $3,781 and $3,692    |                      |  |                              
|Premises
      and equipment, net                                     |                      |  |                              
|Other real
      estate                                               |                      |  |                              
|Accrued interest
      receivable                                     |                      |  |                              
|Goodwill                                                              |                      |  |                              
|Other assets                                                          |                      |  |                              
|                                                                      |                      |  |                              
|Total
      assets                                                    |                      |  | $                            
|                                                                      |                      |  |                              
|LIABILITIES AND SHAREHOLDERS EQUITY                                  |                      | 
|Liabilities                                                           |                      | 
|Deposits                                                              |                      | 
|Noninterest-bearing                                                   |                      |  | $                            
|Interest-bearing                                                      |                      |  |                              
|                                                                      |                      |  |                              
|Total
      deposits                                                  |                      |  |                              
|Federal Home
      Loan Bank advances                                 |                      |  |                              
|Long-term
      debt                                                  |                      |  |                              
|Accrued interest
      and other liabilities                          |                      |  |                              
|                                                                      |                      |  |                              
|Total
      liabilities                                               |                      |  |                              
|                                                                      |                      |  |                              
|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                                                |                      |  |                              
|Additional
      paid-in capital                                      |                      |  |                              
|Retained
      earnings                                               |                      |  |                              
|Treasury
      stock, 330,088 and 320,088 shares at cost              |                      |  |                              
|Accumulated
      other comprehensive income                          |                      |  |                              
|                                                                      |                      |  |                              
|Total
      shareholders equity                                      |                      |  |                              
|                                                                      |                      |  |                              
|Total
      liabilities and shareholders equity                      |                      |  | $                            
|                                                                      |                      |  |                              

|See accompanying notes
to consolidated financial statements.


3
|----------------------------------------------------------------

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

|                                                          | Three Months
      Ended
      March 31, | 
|--------------------------------------------------------- | ---------------------------------------- | 
|
|Interest
      income                                     |                                          | 
|Loans,
      including fees                               |                                          | 
|Securities                                                |                                          | 
|Federal
      funds sold and other temporary investments  |                                          | 
|                                                          |                                          | 
|Total
      interest income                               |                                          | 
|Interest
      expense                                    |                                          | 
|Deposits                                                  |                                          | 
|FHLB
      advances and federal funds purchased           |                                          | 
|Long-term
      debt                                      |                                          | 
|                                                          |                                          | 
|Total
      interest expense                              |                                          | 
|                                                          |                                          | 
|Net
      interest income                                 |                                          | 
|Provision
      for loan losses                           |                                          | 
|                                                          |                                          | 
|Net
      interest income after provision for loan losses |                                          | 
|Noninterest
      income                                  |                                          | 
|Service
      charges                                     |                                          | 
|Other
      operating income                              |                                          | 
|Realized
      gain on available-for-sale securities      |                                          | 
|                                                          |                                          | 
|Total
      noninterest income                            |                                          | 
|Noninterest
      expense                                 |                                          | 
|Employee
      compensation and benefits                  |                                          | 
|Occupancy
      expenses                                  |                                          | 
|Other
      operating expenses                            |                                          | 
|                                                          |                                          | 
|Total
      noninterest expenses                          |                                          | 
|                                                          |                                          | 
|Earnings
      before income taxes                        |                                          | 
|Provision
      for income taxes                          |                                          | 
|                                                          |                                          | 
|Net
      earnings                                        |                                          | 
|                                                          |                                          | 
|Basic
      earnings per common share                     |                                          | 
|                                                          |                                          | 
|Diluted
      earnings per common share                   |                                          | 
|                                                          |                                          | 

|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
      Ended
      March 31, | 
|----------------------------------------------- | ---------------------------------------- | 
|
|
|Balance
      at beginning of period            |                                          | 
|Net income                                      |                                          | 
|Purchases
      of treasury stock               |                                          | 
|Change in
      unrealized (loss) gain on       |                                          | 
|securities
      available for sale, net of tax |                                          | 
|                                                |                                          | 
|Balance at
      end of period                  |                                          | 
|                                                |                                          | 

|See accompanying notes
to consolidated financial statements.


5
|----------------------------------------------------------------

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

|                                                                | Three Months Ended
March 31, | 
|--------------------------------------------------------------- | ---------------------------- | 
|
|Net cash provided by 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 premises, equipment and other real estate |                              | 
|Net change in federal funds sold                                |                              | 
|                                                                |                              | 
|Net cash used by investing activities                           |                              | 
|                                                                |                              | 
|Cash flows from financing activities:                           |                              | 
|Net change in deposits                                          |                              | 
|Net change in short-term FHLB advances                          |                              | 
|Repayment of long-term FHLB advances                            |                              | 
|Purchase of treasury stock                                      |                              | 
|                                                                |                              | 
|Net cash provided 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)
(UNAUDITED)
|-----------------------------------------------------------------------------------------------------------

|                                                          | Three Months
      Ended
      March 31, | 
|--------------------------------------------------------- | ---------------------------------------- | 
|
|
|Net
      earnings                                        |                                          | 
|Other comprehensive
      income:                         |                                          | 
|Unrealized
      loss on available for sale securities    |                                          | 
|arising
      during the period                           |                                          | 
|Reclassification
      adjustment for amounts realized on |                                          | 
|securities
      sales included in net earnings           |                                          | 
|                                                          |                                          | 
|Net
      unrealized loss                                 |                                          | 
|Tax
      effect                                          |                                          | 
|                                                          |                                          | 
|Total
      other comprehensive loss                      |                                          | 
|                                                          |                                          | 
|Comprehensive
      income                                |                                          | 
|                                                          |                                          | 

|See accompanying notes
to consolidated financial statements


7
|---------------------------------------------------------------

|GUARANTY BANCSHARES,
INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
(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, Guaranty (TX) Capital Trust II, and Guaranty Financial Corp., Inc., which
wholly owns Guaranty Bond Bank (the Bank). Guaranty Bond 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 accounting principles
generally accepted 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 for the year ended December 31, 2002, filed with the Securities
and Exchange Commission on March 14, 2003. The Company has consistently followed the
accounting policies described in the Annual Report in preparing this Form 10-Q. Operating
results for the three months ended March 31, 2003, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.


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, other real estate values and status of contingencies are
particularly subject to change.


NOTE 2. 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | Three Months
Ended March 31, | 
|------------------------------------------------ | ---------------------------- | 
|
|
|Weighted-average common shares used in basic EPS |                              | 
|Potential dilutive common shares                 |                              | 
|                                                 |                              | 
|Weighted-average common and potential dilutive   |                              | 
|common shares used in dilutive EPS               |                              | 
|                                                 |                              | 

|8
|-

|NOTE 3. STOCK OPTIONS


In
2000, the Company granted nonqualified stock options to certain executive officers of the
Company and the 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 March 31, 2003, options for 2000 shares have
been exercised and 893,500 options remain available for future grant under the 1998 Stock
Incentive Plan.


In
accordance with a new accounting standard,SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an Amendment of FASB Statement
No. 123, the Company transitioned to the fair value method of accounting for
stock-based compensation during 2002 using the modified prospective method prescribed by
the standard. Under the modified prospective method, the Company began recognizing
stock-based employee compensation expense from the beginning of 2002 as if the fair value
method had been used to account for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. The fair value of options granted is
determined using the Black-Scholes option valuation model. Stock-based employee
compensation expense totaled approximately $13,000 and $6,000 for the three months ended March 31,
2003 and 2002, respectively. Under the modified prospective method, no stock-based
employee compensation expense is recognized for periods prior to adoption.


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. There were no options granted or exercised in the three months ended March
31, 2003.


NOTE 4. COMMITMENT AND
CONTINGENCIES


In
the normal course of business, the Company enters into various transactions, which, in
accordance with accounting principles generally accepted 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.


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.


9
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                             | Contract or
Notional 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.


In
November 1998, Guaranty Leasing was informed by the Internal Revenue Service (the
Service) that it has taken the position that certain losses taken by one of
the three Partnerships during 1994, 1995 and 1996 of $302,000, $410,000 and $447,000,
respectively, would be disallowed. In October 2001, Guaranty Leasing was informed by the
Service that it has taken the position that certain losses taken by the Partnership during
1997 of $487,000 would also be disallowed. In September 2002, the Company received from
the Service a Notice of Final Partnership Administrative Adjustment (FPAA)
disallowing these deductions. Based upon the advice of counsel, the Company believes that
it has correctly reported these transactions for tax purposes and that it has obtained
appropriate legal, accounting and appraisal opinions and authority to support its
positions. However, as of December 31, 2002, the Company had recorded and expensed the tax
affect of the disallowed deductions. On February 3, 2003, the Company filed a petition to
begin the process to litigate the matter in the United States District Court for the
Eastern District of Texas. Any final determination with respect to the Partnership will be
binding on the Company. Should the Service pursue an investigation of and ultimately
disallow the related tax deductions taken during the remaining years of the above
partnership as well as the other two partnerships, the Company would be required to
recognize an additional maximum tax liability of approximately $3.9 million plus possible
penalty and interest. The Company is actively contesting the position of the Service in
connection with this matter, and will take appropriate steps necessary to protect its
legal position. During 2002, the Company sold its ownership in one of the partnerships and
dissolved the other two, therefore no additional deductions have been taken in 2003.


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, 2002 as filed with the
Securities and Exchange Commission.


10
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 Bond 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 an office in Fort Stockton, Texas that limits its
product offerings to loans and time deposits.


FINANCIAL OVERVIEW


Net
earnings available to common shareholders for the three months ended March 31, 2003 were
$1.0 million or $0.35 per share compared with $982,000 or $0.33 per share for the three
months ended March 31, 2002, an increase of $53,000 or 5.4%. The increase is due primarily
to an increase in net interest income of $273,000 or 6.9%, an increase in other operating
income of $209,000 or 59.1% and an increase of realized gain on sale of securities of
$104,000 or 281%, which increases were offset by an increase in noninterest expenses of
$462,000 or 11.7%.


Gross
loans decreased to $364.9 million at March 31, 2003, from $365.6 million at December 31,
2002, a decrease of $675,000 or 0.2%. Total assets increased to $528.2 million at March
31, 2003, compared with $518.0 million at December 31, 2002. The increase of $10.3 million
in total assets is primarily in cash and securities available for sale which increased
$928,000 and $11.1 million, respectively offset by decreases in federal funds sold and
gross loans of $1.4 million and $675,000 respectively. The net increase in assets resulted
from an increase in deposits of $1.0 million and an increase in Federal Home Loan Bank
(FHLB) advances of $9.9 million. Total deposits increased to $426.0 million at March 31,
2003 compared with $425.0 million at December 31, 2002. This increase comes primarily from
an increase in certificate of deposits of $2.6 million or 1.1%, partially offset by a net
decrease in NOW, savings, and money market accounts of $1.9 million or 1.6%.


Total
shareholders equity was $35.1 million at March 31, 2003, representing an increase of
$437,000 or 1.3% from December 31, 2002. This increase is due to the earnings for the
period of $1.0 million partially offset by a decrease in accumulated other comprehensive
income of $437,000 and the purchase of 10,000 shares of treasury stock at a cost of
$161,000.


RESULTS OF OPERATIONS


Interest Income


Interest
income for the three months ended March 31, 2003 was $7.0 million, a decrease of $38,000
or 0.5% compared with the three months ended March 31, 2002. The decrease in interest
income is due primarily to lower yields on earning assets partially offset by an increase
in the average volume of earning assets. Average loans were $361.5 million for the three
months ended March 31, 2003, compared with $330.9 million for the three months ended March
31, 2002, an increase of $30.6 million or 9.3%. Average securities were $108.9 million for
the three months ended March 31, 2003, compared with $79.5 million for the three months
ended March 31, 2002, an increase of $29.4 million or 36.9%. Average federal funds sold
were $4.5 million for the three months ended March 31, 2003, compared with $12.7 million
for the three months ended March 31, 2002, a decrease of $8.2 million or 64.6%. Growth in
the average volume of interest-earning assets was primarily funded by the growth in
deposits for the period and an increase in FHLB advances. The decrease in interest income
are primarily due to a decrease in the average yield earned on interest-earning assets
from 6.79% during the three months ended March 31, 2002 to 6.01% during the three months
ended March 31, 2003.


11
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest Expense


Interest
expense on deposits and other interest-bearing liabilities was $2.8 million for the three
months ended March 31, 2003, compared with $3.1 million for the three months ended March
31, 2002, a decrease of $311,000 or 9.9%. The decrease in interest expense is due
primarily to a lower yield in average interest-bearing liabilities from 3.48% for the
three months ended March 31, 2002, to 2.75% for the three months ended March 31, 2003. The
decrease was partially offset by growth in the average volume of interest-bearing
liabilities and FHLB advances. Average interest-bearing deposits were $360.0 million for
the three months ended March 31, 2003, compared with $326.1 million for the three months
ended March 31, 2002, an increase of $33.9 million or 10.4%. Average FHLB advances were
$47.1 million for the three months ended March 31, 2003 compared with $33.0 million for
the three months ended March 31, 2002, an increase of $14.0 million or 42.5%. Average
long-term debt increased from $7.0 million for the three months ended March 31, 2002 to
$10.0 million for the three months ended March 31, 2003 due to the issuance of $3.0
million in trust preferred securities by the Company in October 2002.


Net Interest Income


Net
interest income was $4.2 million for the three months ended March 31, 2003 compared with
$3.9 million for the three months ended March 31, 2002, an increase of $273,000 or 6.9%.
The increase in net interest income resulted primarily from growth in average
interest-earning assets to $474.9 million for the three months ended March 31, 2003, from
$423.1 million for the three months ended March 31, 2002, an increase of $51.8 million or
12.2%, partially offset by an increase in total interest-bearing liabilities to $417.1
million for the three months ended March 31, 2003, from $366.2 million for the three
months ended March 31, 2002, an increase of $51.0 million or 13.9%. The net interest
margin decreased from 3.78% to 3.60% for the three months ended March 31, 2003 compared
with the same three months period ended March 31, 2002. This decrease can be attributed to
the fact that the percentage growth in average interest-earning liabilities exceeded the
percentage growth in average interest-bearing assets, thereby causing the ratio of average
interest-earning assets to average interest-bearing liabilities to decrease. Additionally,
the average rate paid on interest-bearing assets decreased at a faster rate than the
average rate earned on interest-earning liabilities due to the Banks positive gap
position in a falling interest rate environment.


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 average rate earned or paid for the
three months ended March 31, 2003 and 2002, 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.


12
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Three Months Ended March 31, | 
|-------------------------------------------------- | ---------------------------- | 
|
|
|
|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                                |                              | 
|                                                   |                              | 

|13
|--

|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 as follows
(dollars in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              | Three Months Ended March 31,
|--------------------------------------------- | ----------------------------
|
|
|
|
|Interest-earning assets:                      |                             
|Loans                                         |                             
|Securities                                    |                             
|Federal funds sold                            |                             
|                                              |                             
|Total increase (decrease) in interest income  |                             
|                                              |                             
|Interest-bearing liabilities:                 |                             
|NOW, savings, and money market                |                             
|accounts                                      |                             
|Time deposits                                 |                             
|Other borrowed funds                          |                             
|Trust preferred                               |                             
|                                              |                             
|Total increase (decrease) in interest expense |                             
|                                              |                             
|Increase (decrease) 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, and the evaluation of the
Companys loan portfolio by an external loan review firm. The provision for loan
losses for the three months ended March 31, 2003, is $375,000, compared with $250,000 for
the three months ended March 31, 2002, an increase of $125,000 or 50.0%. The increase is
due to the increase in average loans of 9.3% over the comparable three months 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.


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

|Noninterest Income


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

|                                    | Three Months
Ended March 31, | 
|----------------------------------- | ---------------------------- | 
|
|
|Service charges on deposit accounts |                              | 
|Fee income                          |                              | 
|Fiduciary income                    |                              | 
|Other noninterest income            |                              | 
|Realized gain on securities         |                              | 
|                                    |                              | 
|Total noninterest income            |                              | 
|                                    |                              | 

|As
the table above indicates, the Companys primary sources of recurring noninterest
income are service charges on deposit accounts and fee income. Noninterest income for the
three months ended March 31, 2003 increased $352,000 or 34.0% over the same period ended
March 31, 2002. The increase in noninterest income for the three months ending March 31,
2003 is primarily due to the increase in gain on sale of securities realized in 2003 over
2002, an increase in service charges on deposit accounts created by an increase in the
number of deposit accounts, and an increase in the sale of mortgage loans into the
secondary market. In the three months ended March 31, 2003, the Company realized a gain on
sale of mortgage-backed securities of $141,000 from the sale of $24.5 million of
securities compared with a gain on the sale of mortgage-backed securities of $37,000 from
the sale of $4.2 million of securities during the three months ended March 31, 2002.
Disregarding the gain on sale of securities, the Companys increase in noninterest
income was $248,000 or 24.9%. Fee income and other noninterest income increases were
primarily the result of an increase in the volume of mortgage loans sold into the
secondary market. This activity generated noninterest income of $229,000 for the three
months ended March 31, 2003 compared with $44,000 for the three months ended March 31,
2002, an increase of $185,000 or 420.5%.


15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Noninterest Expenses


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

|                                   | Three Months
Ended March 31, | 
|---------------------------------- | ---------------------------- | 
|
|
|Employee compensation and benefits |                              | 
|                                   |                              | 
|Non-staff expenses:                |                              | 
|Net bank premises expense          |                              | 
|Office and computer supplies       |                              | 
|Legal and professional fees        |                              | 
|Advertising                        |                              | 
|Postage                            |                              | 
|FDIC insurance                     |                              | 
|Other                              |                              | 
|                                   |                              | 
|Total non-staff expenses           |                              | 
|                                   |                              | 
|Total noninterest expenses         |                              | 
|                                   |                              | 

|The
increase in employee compensation and benefits for the three months ended March 31, 2003
is 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 220 and 193 at March 31, 2003 and March 31, 2002 respectively.


Other
non-staff expenses increased $135,000 or 22.2% over the comparable three months period in
2002. Increases in other non-staff expenses were partially the result of increases in
software support fees and ATM and debit card expenses.


Income Taxes


Income
tax expense decreased $15,000 to $237,000 for the three months ended March 31, 2003 from
$252,000 for the same period in 2002. 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 $364.9 million at March 31, 2003, a decrease of $675,000 or 0.2% from $365.6
million at December 31, 2002. Loan growth occurred primarily in the commercial real estate
and in construction and land development loans, offset by decreases in consumer,
commercial and industrial loans. Average loans comprised 76.1% of total average
interest-earning assets at March 31, 2003 compared with 78.2% at March 31, 2002.


16
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
following table summarizes the loan portfolio of the Company by type of loan as of March
31, 2003 and December 31, 2002 (dollars in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | March 31, 2003 |  | December 31, 2002
|--------------------------------- | -------------- |  | -----------------
|
|
|Commercial and industrial         |                |  | $                
|Agriculture                       |                |  |                  
|Real estate:                      |                | 
|Construction and land development |                |  |                  
|1-4 family residential            |                |  |                  
|Loans, held for sale              |                |  |                  
|Farmland                          |                |  |                  
|Commercial                        |                |  |                  
|Multi-family residential          |                |  |                  
|Consumer                          |                |  |                  
|                                  |                |  |                  
|Total loans                       |                |  | $                
|                                  |                |  |                  

|Allowance for Loan Losses


In
originating loans, the Company recognizes that it will experience credit losses and that
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 three months ended March 31, 2003
increased $170,000 or 146.6% over the same period ended March 31, 2002. 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 March 31, 2003 and
March 31, 2002, the allowance for loan losses totaled $3.8 million or 1.04% of gross loans
and $3.5 million or 1.04% of gross loans, respectively. The allowance for loan losses as a
percentage of nonperforming loans was 88.42% at March 31, 2003.


17
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                                        | Three Months
Ended March 31, | 
|------------------------------------------------------- | ---------------------------- | 
|
|
|Average loans outstanding                               |                              | 
|                                                        |                              | 
|Gross loans outstanding at end of period                |                              | 
|                                                        |                              | 
|Allowance for loan losses at beginning of period        |                              | 
|Provision for loan losses                               |                              | 
|Charge-offs:                                            |                              | 
|Commercial and industrial                               |                              | 
|Real estate                                             |                              | 
|Consumer                                                |                              | 
|Recoveries:                                             |                              | 
|Commercial and industrial                               |                              | 
|Real estate                                             |                              | 
|Consumer                                                |                              | 
|                                                        |                              | 
|Net loan (charge-offs) recoveries                       |                              | 
|                                                        |                              | 
|Allowance for loan losses at end of period              |                              | 
|                                                        |                              | 
|Ratio of allowance to end of period loans               |                              | 
|Ratio of net charge-offs to average loans               |                              | 
|Ratio of allowance to end of period nonperforming loans |                              | 

|Nonperforming Assets


Nonperforming
assets were $6.0 million at March 31, 2003 compared with $4.3 million at December 31,
2002. Nonaccrual loans increased $156,000 from $2.8 million at December 31, 2002 to $3.0
million at March 31, 2003. This increase is due primarily to a number of small lines added
totaling $731,000 partially offset by two lines of credit totaling $575,000 taken off
nonaccrual status. The new lines have collateral value which exceeds the total debts and
no loss is anticipated. Accruing loans 90 or more days past due increased $906,000, from
$404,000 at December 31, 2002 to $1.3 million at March 31, 2003. This increase is due
primarily to two lines of credit totaling $1.7 million becoming past due, partially offset
by smaller lines of credit totaling $794,000 and becoming current. Management believes
that these lines of credits are well collateralized and no loss is anticipated. Other real
estate increased $605,000 during the same period. This increase is primarily the result of
loans that were foreclosed on during the period totaling $767,000, net of sales of
properties with a carrying value of $162,000. 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 1.63% and 1.18% at
March 31, 2003, and December 31, 2002, respectively.


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

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

|                                        | March 31,
2003 |  | December 31,
2002
|--------------------------------------- | -------------- |  | -----------------
|
|Nonaccrual loans                        |                |  | $                
|Accruing loans 90 or more days past due |                |  |                  
|                                        |                |  |                  
|Total nonperforming loans               |                |  |                  
|Other real estate                       |                |  |                  
|                                        |                |  |                  
|Total nonperforming assets              |                |  | $                
|                                        |                |  |                  

|Securities


Securities
totaled $118.0 million at March 31, 2003, an increase of $11.0 million from $107.0 million
at December 31, 2002. At March 31, 2003, securities represented 22.3% of total assets
compared with 20.7% of total assets at December 31, 2002. The yield on average securities
for the three months ended March 31, 2003, is 4.00% compared with 5.55% for the same
period in 2002. At March 31, 2003 securities included $6.6 million in U.S. Government
securities, $90.9 million in mortgage-backed securities, $16.1 million in collateralized
mortgage obligations, $3.1 million in equity securities, and $1.3 million in municipal
securities. The average life of the securities portfolio at March 31, 2003 is
approximately 3.81 years, however, all of the Companys securities are classified as
available-for-sale.


Other Assets


Other
assets totaled $9.4 million at March 31, 2003 compared with $9.3 million at December 31,
2002, an increase of $113,000 or 1.2%. This increase resulted primarily from the recording
of additional cash value of key-man life insurance that the Company owns.


Deposits


At
March 31, 2003, demand, money market and savings deposits account for approximately 42.7%
of total deposits, while certificates of deposit make up 57.3% of total deposits. Total
deposits increased $1.0 million or 0.2% from December 31, 2002 to March 31, 2003. This
increase comes primarily from an increase in certificates of deposits of $2.6 million or
1.1% due to the offering of competitive yields on these deposits, partially offset by a
decrease in NOW accounts of $1.3 million or 3.2%. Noninterest-bearing demand deposits
totaled $68.8 million or 16.1% of total deposits at March 31, 2003, compared with $68.5
million or 16.1% of total deposits at December 31, 2002. The average cost of deposits,
including noninterest-bearing demand deposits, is 2.38% for the three months ended March
31, 2003 compared with 2.98% for the same period in 2002.


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.


19
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 three months of 2003 are
the purchases of securities available for sale of $52.4 million, the sales of securities
available for sale of $24.5 million, maturities, calls, and principal repayments of
securities totaling $15.8 million, the net change in shortterm FHLB advances of
$10.0 million, and the net decrease in loans of $3.7 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 the Bank, have established certain minimum risk-based capital standards
that apply to bank holding companies and federally insured banks, respectively. As of
March 31, 2003, the Companys Tier 1 risk-based capital, total risk-based capital and
leverage capital ratios are 11.41%, 12.45%, and 8.07%, respectively. As of March 31, 2003,
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 10.68%, 11.71%, and 7.59%,
respectively.


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, 2002. See Form 10-K, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk.


ITEM 4. CONTROLS AND
PROCEDURES


(a)        Evaluation
of Disclosure Controls and Procedures.


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


(b)       Changes
in internal controls


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


20
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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


None


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:
| | -----------------------------------------------------------------------------------------------

| | 99.1
 Certification of Chief Executive Officer
| | ----------------------------------------------

| | 99.2
 Certification of Chief Financial Officer
| | ----------------------------------------------

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

| | No
report on Form 8-K was filed by Guaranty Bancshares, Inc., during the three months ended
March 31, 2003.
| | -----------------------------------------------------------------------------------------------------------

|21
|--

|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: May 14, 2003 |  | GUARANTY BANCSHARES, INC.
(Registrant)
      By: /s/ Arthur B. Scharlach, Jr.
      
Arthur B. Scharlach, Jr.President
(Principal Executive Officer)
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date:   May 14, 2003 |  | By: /s/Clifton
      A. Payne
      
Clifton A. Payne
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
|-------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--

|Certification


I, Arthur B. Scharlach, Jr. certify
that:


     1.    
          I have reviewed this quarterly report on Form 10-Q of Guaranty Bancshares, Inc.;


     2.    
          Based on my knowledge, this quarterly report does not contain any untrue
          statement of a material fact or omit to state a material fact necessary to make
          the statements made, in light of the circumstances under which such statements
          were made, not misleading with respect to the period covered by this quarterly
          report;


     3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this quarterly report;


     4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a.
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly
report is being prepared;


b.
evaluated the effectiveness of the registrants disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and


c.
presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the           Evaluation
Date;


     5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):


a.
all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and


b.
any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and


     6.    
          The registrants other certifying officers and I have indicated in this
          quarterly report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated: May 14, 2003 |  | By: /s/ Arthur B. Scharlach, Jr.
Name: Arthur B. Scharlach, Jr.
Title: President and Chief Executive Officer
|------------------- |  | --------------------------------------------------------------------------------------------------------------------------

|23
|--

|Certification


I, Clifton A. Payne certify that:


     1.    
          I have reviewed this quarterly report on Form 10-Q of Guaranty Bancshares, Inc.;


     2.    
          Based on my knowledge, this quarterly report does not contain any untrue
          statement of a material fact or omit to state a material fact necessary to make
          the statements made, in light of the circumstances under which such statements
          were made, not misleading with respect to the period covered by this quarterly
          report;


     3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this quarterly report;


     4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a.
          designed such disclosure controls and procedures to ensure that material
          information relating to the registrant, including its consolidated
subsidiaries,           is made known to us by others within those entities, particularly
during the           period in which this quarterly report is being prepared;


b.
          evaluated the effectiveness of the registrants disclosure controls and
          procedures as of a date within 90days prior to the filing date of this
          quarterly report (the Evaluation Date); and


c.
          presented in this quarterly report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of the
          Evaluation Date;


     5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):


a.
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and


b.
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and


     6.    
          The registrants other certifying officers and I have indicated in this
          quarterly report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated: May 14, 2003 |  | By: /s/ Clifton A. Payne
Name: Clifton A. Payne
Title: Senior Vice President, and Chief
          Financial Officer
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------

|24
|--

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

|ExhibitNumber | Description | Page Number
|------------- | ----------- | -----------
|99.1          |             |            
|99.2          |             |            

|25
|--