|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 SEPTEMBER 30, 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 file 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 12
        b-2 of the Exchange Act).
        |_| Yes  |X| No


As of November 12, 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.                        |  |      | Interim Consolidated 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 |  |  |  | 11 | 
|Item 3.                        |  |      | Quantitative and Qualitative Disclosures about Market Risk                            |  |  |  | 24 | 
|Item 4.                        |  |      | Controls and Procedures                                                               |  |  |  | 24 | 
|PART II  OTHER INFORMATION   
|Item 1.                        |  |      | Legal Proceedings                                                                     |  |  |  | 24 | 
|Item 2.                        |  |      | Changes in Securities and Use of Proceeds                                             |  |  |  | 24 | 
|Item 3.                        |  |      | Defaults upon Senior Securities                                                       |  |  |  | 25 | 
|Item 4.                        |  |      | Submission of Matters to a Vote of Security Holders                                   |  |  |  | 25 | 
|Item 5.                        |  |      | Other Information                                                                     |  |  |  | 25 | 
|Item 6.                        |  |      | Exhibits and Reports on Form 8-K                                                      |  |  |  | 25 | 
|Signatures                     |  |      |                                                                                       |  |  |  | 26 | 

|2
|-

|PART I 
FINANCIAL INFORMATION 
ITEM 1. INTERIM
CONSOLIDATED FINANCIAL STATEMENTS


GUARANTY BANCSHARES,
INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
 (DOLLARS IN THOUSANDS)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                           | September 30,
2003 |  | December 31,
2002
|-------------------------------------------------------------------------- | ------------------ |  | -----------------
|
|ASSETS                                                                     |                    |  |                  
|Cash and cash equivalents                                                  |                    |  | $                
|Interest-bearing deposits                                                  |                    |  |                  
|                                                                           |                    |  |                  
|Total cash and cash equivalents                                            |                    |  |                  
|Interest-bearing time deposits                                             |                    |  |                  
|Federal funds sold                                                         |                    |  |                  
|Securities available for sale                                              |                    |  |                  
|Loans held for sale                                                        |                    |  |                  
|Loans, net of allowance for loan losses of $3,840 and $3,692, respectively |                    |  |                  
|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                                                             |                    |  |                  
|FHLB advances and federal funds purchased                                  |                    |  |                  
|Company obligated mandatorily redeemable preferred                         |                    | 
|securities of subsidiary trusts                                            |                    |  |                  
|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 at September 30, 2003 and                                 |                    | 
|at December 31, 2002                                                       |                    |  |                  
|Additional capital                                                         |                    |  |                  
|Retained earnings                                                          |                    |  |                  
|Treasury stock, 330,088 and 320,088 shares, respectively, 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. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
        (UNAUDITED)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|---------------------------------------------------- | -------------------------------- |  | -------------------------------
|
|Interest income                                      |                                  |  |                                
|Loans                                                |                                  |  | $                              
|Securities                                           |                                  |  |                                
|Federal funds sold                                   |                                  |  |                                
|Interest-bearing deposits                            |                                  |  |                                
|                                                     |                                  |  |                                
|Total interest income                                |                                  |  |                                
|Interest expense                                     |                                  | 
|Deposits                                             |                                  |  |                                
|FHLB advances and federal funds purchased            |                                  |  |                                
|Minority interest expense-trust preferred securities |                                  |  |                                
|                                                     |                                  |  |                                
|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 securities available for sale       |                                  |  |                                
|                                                     |                                  |  |                                
|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 BANCSHARES,
INC.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(DOLLARS IN
THOUSANDS) (UNAUDITED)
|--------------------------------------------------------------------------------------------------------------------------------

|                                        | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|--------------------------------------- | -------------------------------- |  | -------------------------------
|
|Balance at beginning of period          |                                  |  | $                              
|Net income                              |                                  |  |                                
|Cash dividends declared on common stock |                                  |  |                                
|Purchases of treasury stock             |                                  |  |                                
|Proceeds from stock option exercises    |                                  |  |                                
|Change in accumulated other             |                                  | 
|comprehensive income, net of tax        |                                  |  |                                
|                                        |                                  |  |                                
|Balance at end of period                |                                  |  | $                              
|                                        |                                  |  |                                

|See accompanying Notes
to Consolidated Financial Statements.


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

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

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

|See accompanying Notes
to Consolidated Financial Statements.



6
|-----------------------------------------------------------------

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

|                                                        | Three Months
Ended September 30, |  | Nine Months
Ended September 30,
|------------------------------------------------------- | -------------------------------- |  | -------------------------------
|
|Net earnings                                            |                                  |  | $                              
|Other comprehensive income:                             |                                  | 
|Unrealized (loss) gain on securities available for sale |                                  | 
|arising during the period                               |                                  |  |                                
|Reclassification adjustment for amounts realized on     |                                  | 
|securities sales included in net earnings               |                                  |  |                                
|                                                        |                                  |  |                                
|Net unrealized (loss) gain                              |                                  |  |                                
|Tax effect                                              |                                  |  |                                
|                                                        |                                  |  |                                
|Total other comprehensive (loss) income                 |                                  |  |                                
|                                                        |                                  |  |                                
|Comprehensive income                                    |                                  |  | $                              
|                                                        |                                  |  |                                

|See accompanying Notes
to Consolidated Financial Statements



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

|GUARANTY BANCSHARES,
INC.NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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). The 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 the
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 and nine months ended September 30, 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 and other real estate and status of contingencies are particularly
subject to change.


Certain
items in prior financial statements have been reclassified to conform with the current
presentation.


NOTE 2. NEW ACCOUNTING
PRONOUNCEMENTS


In
January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, which establishes criteria to
identify and assess a companys interest in variable interest entities and for
consolidating those entities. FIN 46 is currently effective for variable interest entities
created or obtained after January 2003, and will be effective for all variable interest
entities for periods beginning after December 15, 2003. The adoption of FIN 46 is not
expected to require the consolidation by the Company of any additional entities.


In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No.
150), Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. It
is to be implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Adoption of SFAS No.
150 on July 1, 2003 did not have a material effect on the Companys consolidated
financial statements.



8
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3. EARNINGS PER
SHARE


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


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

|                                                 | Three Months
Ended September 30, |  | Nine Months
Ended September 30,
|------------------------------------------------ | -------------------------------- |  | -------------------------------
|
|Weighted average common shares used in basic EPS |                                  |  |                                
|Dilutive effect of stock options                 |                                  |  |                                
|                                                 |                                  |  |                                
|Weighted average common shares used              |                                  | 
|in dilutive EPS                                  |                                  |  |                                
|                                                 |                                  |  |                                

|NOTE 4. STOCK OPTIONS


In
2000, the Company granted nonqualified stock options to certain officers of the Company
and the Bank under the Companys 1998 Stock Incentive Plan. The grants consisted of
options to purchase 89,500 shares of common stock for a term of eight years 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 options to purchase
20,000 shares for a term of eight years 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. In
April 2003, the Company granted options to purchase 38,000 shares at an exercise price of
$15.23 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 grants and annually
thereafter. As September 30, 2003, the 1998 Stock Incentive Plan has had 2,000 options
exercised and has 855,500 options available for future grants.


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 $21,000 and $13,000 for the three months ended
September 30, 2003 and 2002, respectively, and approximately $52,000 and $36,000 for the
nine months ended September 30, 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 2003 was $4.19. 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
1.97%; expected volatility of 26.0%; risk-free interest rate of 3.2%, and an expected life
of 8.00 years.



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

|NOTE 5. COMMITMENTS 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 loan 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. In the event the customer does not perform in accordance with the terms
of the agreement with the third party, the Company would be required to fund the
commitment. The maximum potential amount of future payments the Company could be required
to make is represented by the contractual amount shown in the table below. If the
commitment is funded, the Company would be entitled to seek recovery from the customer. As
of September 30, 2003 and December 31, 2002, no amounts have been recorded as liabilities
for the Banks potential obligations under these guarantees.


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 operations.


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. In February 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. In September 2003, the Judge of this court issued a docket
control order scheduling court ordered deadlines to be met with an expected trial date of
second quarter 2004. 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.


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

|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. 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. These forward-looking statements may involve known and unknown risks and
uncertainties and other factors beyond the Companys control 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 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.


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 for the nine months ended September 30, 2003 were $2.8 million or $0.94 per share
(basic and diluted) compared with $3.2 million or $1.06 per share (basic) and $1.05 per
share (diluted) for the nine months ended September 30, 2002, a decrease of $412,000 or
13.0%. The decrease is due primarily to an increase in noninterest expense of $1.3 million
or 12.0%, partially offset by (i) an increase in net interest income of $421,000 or 3.4%,
(ii) an increase in noninterest income of $159,000 or 4.3%, and (iii) a decrease in
provision for loan losses of $260,000 or 25.1%. Net earnings for the three months ended
September 30, 2003 were $935,000 or $0.32 per share compared with $1.1 million or $0.36
per share for the three months ended September 30, 2002, a decrease of $157,000 or 14.4%.
The decrease is primarily due to an increase in noninterest expense primarily due to
additional employee compensation and benefit costs, partially offset by an increase in net
interest income for the three months period.


The
first nine months of 2003 showed growth in total assets and decreases in loans and
deposits. Total assets increased to $526.2 million at September 30, 2003, compared with
$518.0 million at December 31, 2002. The increase of $8.2 million or 1.60% in total assets
resulted primarily from the proceeds received from Federal Home Loan Bank (FHLB) advances
and federal funds purchased of $12.8 million or 30.0%, partially offset by a decrease in
deposits of $4.2 million or 1.0%. Total FHLB advances and federal funds purchased
increased to $55.6 million at September 30, 2003 compared to $42.8 million at December 31,
2002 to help fund future growth in earning assets. Gross loans decreased to $356.8 million
at September 30, 2003 from $365.6 million at December 31, 2002, a decrease of $8.8 million
or 2.4%. Total deposits decreased to $420.7 million at September 30, 2003 compared to
$425.0 million at December 31, 2002.



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

|Total
shareholders equity was $35.6 million at September 30, 2003, compared with $34.6
million at December 31, 2002, an increase of $1.0 million or 2.8%. This increase is due to
earnings for the period of $2.8 million partially offset by a decrease in accumulated
other comprehensive income of $1.1 million, the payment of dividends of $497,000 and the
purchase of 10,000 shares of common stock as treasury stock at a cost of $161,000 pursuant
to the Companys repurchase program.


RESULTS OF OPERATIONS


Interest Income


Interest
income for the nine months ended September 30, 2003 was $20.8 million, a decrease of
$866,000 or 4.0% compared with the nine months ended September 30, 2002. Despite the
increase in average interest-earning assets, interest income decreased primarily due to
lower rates earned on earnings assets as a result of the falling interest rate
environment. The average interest rate earned on interest-earnings assets decreased from
6.58% during the nine months ended September 30, 2002 to 5.79% during the nine months
ended September 30, 2003. Average loans were $360.4 million for the nine months ended
September 30, 2003, compared with $338.7 million for the nine months ended September 30,
2002, an increase of $21.7 million or 6.4%. Average securities were $111.3 million for the
nine months ended September 30, 2003, compared with $87.6 million for the nine months
ended September 30, 2002, an increase of $23.7 million or 27.1%. Growth in the average
volume of interest-earning assets was primarily funded by a growth in deposits for the
comparable periods and an increase in FHLB advances.


Interest
income for the three months ended September 30, 2003 was $6.7 million, a decrease of
$635,000 or 8.6% compared with the three months ended September 30, 2002. The decrease was
primarily due to a decrease in the average yield on interest-earning assets from 6.43%
during the three months ended September 30, 2002 to 5.56% during the three months ended
September 30, 2003, partially offset by a $25.3 million increase in average
interest-earning assets.


Interest Expense


Interest
expense on deposits and other interest-bearing liabilities was $8.0 million for the nine
months ended September 30, 2003, compared with $9.3 million for the nine months ended
September 30, 2002, a decrease of $1.3 million or 13.8%. The decrease in interest expense
is due primarily to a decrease in average interest rate paid on interest-bearing
liabilities from 3.26% for the nine months ended September 30, 2002 to 2.55% for the nine
months ended September 30, 2003. The decrease is partially offset by a $38.0 million or
10.0% increase in average interest-bearing liabilities to $419.7 million for the nine
months ended September 30, 2003, from $381.8 million for the nine months ended September
30, 2002.


Interest
expense was $2.4 million for the three months ended September 30, 2003, compared with $3.1
million for the three months ended September 30, 2002, a decrease of $648,000 or 21.2%.
The decrease in interest expense for the comparable three month period is also due to
decreases in average interest rates paid on interest-bearing liabilities, partially offset
by increases in average balances.


Net Interest Income


Net
interest income was $12.8 million for the nine months ended September 30, 2003 compared
with $12.3 million for the nine months ended September 30, 2002, an increase of $421,000
or 3.4%. The increase in net interest income resulted primarily from growth in average
interest-earnings assets to $479.4 million for the nine months ended September 30, 2003,
from $439.5 million for the nine months ended September 30, 2002, an increase of $39.9
million or 9.1%, partially offset by growth in average interest-bearing liabilities to
$419.7 million for the nine months ended September 30, 2003, from $381.8 million for the
nine months ended September 30, 2002, an increase of $38.0 million, or 10.0%. Net interest
income was $4.3 million for the three months ended September 30, 2003 and September 30,
2002. The net interest margin decreased from 3.75% to 3.57% for the three months ended
September 30, 2003 and decreased from 3.75% to 3.56% for the nine months ended September
30, 2003 compared to the same three and nine-month periods ended September 30, 2002. The
decrease for the three and nine months ended September 30, 2003 can be attributed to the
fact that the percentage growth in average interest bearing liabilities exceeded the
percentage growth in average interest-earning assets causing the ratio of average
interest-earning assets to average interest-bearing liabilities to decrease.



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

|Additionally,
the average rate earned on interest-earning assets decreased at a faster rate than the
average rate paid on interest-bearing liabilities due to the Banks positive gap
position in a down 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 and nine months ended
September 30, 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. No tax equivalent adjustments were made and all average balances are derived from
average daily balances. Nonaccruing loans have been included in the tables as loans
carrying a zero yield.



13
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Three Months Ended September 30,
|-------------------------------------------- | --------------------------------
|
|
|
|Assets                                       |                                 
|Interest-earning assets:                     |                                 
|Loans                                        |                                 
|Securities                                   |                                 
|Federal funds sold                           |                                 
|Interest-bearing deposits in                 |                                 
|other financial institutions                 |                                 
|                                             |                                 
|Total interest-earning assets                |                                 
|Less allowance for loan losses               |                                 
|                                             |                                 
|Total interest-earning                       |                                 
|assets,  net of allowance                    |                                 
|Non-earning assets:                          |                                 
|Cash and due from banks                      |                                 
|Premises and equipment                       |                                 
|Interest receivable and                      |                                 
|other assets                                 |                                 
|Other real estate owned                      |                                 
|                                             |                                 
|Total assets                                 |                                 
|                                             |                                 
|Liabilities and shareholders equity         |                                 
|Interest-bearing liabilities:                |                                 
|NOW, savings, and money                      |                                 
|market accounts                              |                                 
|Time deposits                                |                                 
|                                             |                                 
|Total interest-bearing                       |                                 
|deposits                                     |                                 
|FHLB advances and federal funds purchased    |                                 
|Minority interest-trust preferred securities |                                 
|                                             |                                 
|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                          |                                 
|                                             |                                 

|14
|--

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

|15
|--

|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
proportionately to changes due to rate and changes due to volume (dollars in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           | Three Months
      Ended September 30,
|---------------------------------------------------------- | --------------------------------------
|
|
|
|
|Interest-earning
      assets:                             |                                       
|Loans                                                      |                                       
|Securities                                                 |                                       
|Federal
      funds sold                                   |                                       
|Interest-bearing
      deposits in other                   |                                       
|financial
      institutions                               |                                       
|                                                           |                                       
|Total
      change in interest income                      |                                       
|                                                           |                                       
|Interest-bearing liabilities:                              |                                       
|NOW,
      savings, and money market                       |                                       
|accounts                                                   |                                       
|Time
      deposits                                        |                                       
|FHLB
      advances and federal funds purchased            |                                       
|Minority
      interest expense-trust preferred securities |                                       
|                                                           |                                       
|Total
      change in interest expense                     |                                       
|                                                           |                                       
|Total
      change in net interest income                  |                                       
|                                                           |                                       

|16
|--

|                                                           | Nine Months
      Ended September 30,
|---------------------------------------------------------- | -------------------------------------
|
|
|
|
|Interest-earning
      assets:                             |                                      
|Loans                                                      |                                      
|Securities                                                 |                                      
|Federal
      funds sold                                   |                                      
|Interest-bearing
      deposits in other                   |                                      
|financial
      institutions                               |                                      
|                                                           |                                      
|Total
      change in interest income                      |                                      
|                                                           |                                      
|Interest-bearing liabilities:                              |                                      
|NOW,
      savings, and money market                       |                                      
|accounts                                                   |                                      
|Time
      deposits                                        |                                      
|FHLB
      advances & federal funds purchased              |                                      
|Minority
      interest expense-trust preferred securities |                                      
|                                                           |                                      
|Total
      change in interest expense                     |                                      
|                                                           |                                      
|Total
      change in net interest income                  |                                      
|                                                           |                                      

|Provision for Loan Losses


Provisions
for loan losses are charged to income to bring the total allowance for loan losses to a
level deemed appropriate by management of the Company based on such factors as the
industry diversification of the Companys commercial loan portfolio, the effect of
changes in the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic indicators
and their probable impact on borrowers, the amount of charge-offs for the period, the
amount of nonperforming loans and related collateral security, and the evaluation of the
Companys loan portfolio by an external loan review firm. The provision for loan
losses for the nine months ended September 30, 2003, was $775,000 compared to $1.0 million
for the nine months ended September 30, 2002, a decrease of $260,000 or 25.1%. The
provision for loan losses for the three months ended September 30, 2003, was $250,000
compared to $335,000 for the three months ended September 30, 2002, a decrease of $85,000
or 25.4%. The decrease for both periods was partially due to the decrease in the ratio of
net charge offs to average loans from 0.22% for the nine-months ended September 30, 2002
to 0.17% for the nine months ended September 30, 2003. Management believes the allowance
for loan losses is adequate as of the dates indicated based on its assessment of the
factors listed above.



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

|Noninterest Income


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

|                                    | Three months ended
September 30, |  | Nine months ended
September 30,
|----------------------------------- | -------------------------------- |  | -------------------------------
|
|
|Service charges on deposit accounts |                                  |  | $                              
|Fee income                          |                                  |  |                                
|Fiduciary income                    |                                  |  |                                
|Other noninterest income            |                                  |  |                                
|Realized gain on securities         |                                  |  |                                
|                                    |                                  |  |                                
|Total noninterest income            |                                  |  | $                              
|                                    |                                  |  |                                

|As
indicated above, the Companys primary sources of recurring noninterest income are
service charges on deposit accounts, fee income and other noninterest income. Noninterest
income for the nine months ended September 30, 2003 increased $159,000, or 4.3% over the
same period in 2002. The increase was primarily due to increases in mortgage loan
origination and loan processing fees and an increase in other noninterest income due to
the increased volume of sales of mortgage loans into the secondary market. These increases
were partially offset by a decrease in realized gain on sale of securities of $177,000, or
48.6% for the same comparable period. Noninterest income for the three month period ended
September 30, 2003 decreased $18,000 or 1.5% primarily due to a decrease in service
charges on deposit accounts during the same period in 2002 and a decrease in realized gain
on securities sold.



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

|Noninterest Expenses


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

|                                   | Three months ended
September 30, |  | Nine months ended
September 30,
|---------------------------------- | -------------------------------- |  | -------------------------------
|
|
|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         |                                  |  | $                              
|                                   |                                  |  |                                

|Employee
compensation and benefits expense increased $173,000, or 8.1%, and $643,000, or 10.1%, for
the three and nine months ended September 30, 2003, respectively, compared with the same
periods in 2002. The increase for both the three and nine month periods ended September
30, 2003 was due primarily to normal salary increases and additional staff placement in
the Mt. Pleasant, Texarkana, and Sulphur Springs locations to handle customer growth. The
number of full-time equivalent employees was 222 at September 30, 2003, compared with 213
at September 30, 2002, an increase of 4.2%.


Non-staff
expenses increased $107,000, or 6.9%, and $642,000, or 14.6%, for the three and nine
months ended September 30, 2003, respectively, compared with the same periods in 2002. Net
bank premises expense increased $11,000, or 2.2% and $59,000, or 4.1%, respectively, in
2003 over the comparable periods in 2002 primarily due to higher building maintenance
expense and increased property tax expense. Legal and professional expense also increased
by $42,000, or 8.2% for the nine months ended September 30, 2003 primarily due to the cost
incurred to contest the position the Internal Revenue Service took regarding Guaranty
Leasing Partnership deductions.


Other
non-staff expenses increased $132,000, or 21.1% and $531,000, or 29.2%, for the three and
nine month periods ended September 30, 2003, respectively, compared with the same periods
in 2002. These increases were primarily the result of an increase in software support
fees, ATM and debit card expenses, a permanent impairment charge to the Aircraft Finance
Trust lease in the amount of $113,000 taken in the second quarter of 2003, and the
upgrading of telephone communication lines.


Income Taxes


Income
tax expense for the nine months ended September 30, 2003 and 2002 was $1.1 million. Income
tax expense was $370,000 for the three months ended September 30, 2003 compared with
$413,000 for the three months ended September 30, 2002, a decrease of $43,000 or 10.4%.
The decrease in the three months ended September 30, 2003 was primarily attributable to
the decrease in income before income taxes. 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.



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

|FINANCIAL CONDITION


Loan Portfolio
(including loans held for sale)


Gross
loans were $356.8 million at September 30, 2003, a decrease of $8.8 million or 2.4% from
$365.6 million at December 31, 2002. The decrease occurred primarily in 1-4 family
residential loans due to an increased volume of loans refinanced and placed into the
secondary market and in commercial and industrial loans. Average loans comprised 75.2% of
total average interest-earning assets at September 30, 2003 compared with 77.1% at
September 30, 2002.


The
following table summarizes the loan portfolio of the Company by type of loan as of
September 30, 2003 and December 31, 2002 (dollars in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | September 30, 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, net of unearned discounts |                    |  |                  
|                                    |                    |  |                  
|Total gross loans                   |                    |  | $                
|                                    |                    |  |                  

|Allowance for Loan Losses


In
originating loans, the Company recognizes that it will experience credit losses and the
risk of loss will vary with, among other things, general economic conditions, the type of
loan being made, the creditworthiness of the borrower over the term of the loan and, in
the case of a collateralized loan, the quality of the collateral for such loan. The
Company maintains an allowance for loan losses in an amount that it believes is adequate
for estimated losses in its loan portfolio. Management determines the adequacy of the
allowance through its evaluation of the loan portfolio and based on the factors set forth
in Results of OperationsProvision for Loan Losses. 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 nine
month period ended September 30, 2003 decreased $122,000 or 16.3% compared with the same
period in 2002 September 30, 2002. At September 30, 2003 and September 30, 2002, the
allowance for loan losses totaled $3.8 million or 1.08% of gross loans and $3.6 million or
1.03% of gross loans, respectively. The allowance for loan losses as a percentage of
nonperforming loans was 114.83% and 102.66% at September 30, 2003 and 2002, respectively.



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

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

|                                                              | Nine months
      ended
      September 30,
      2003 |  | Nine months
      ended
      September 30,
      2002
|------------------------------------------------------------- | ------------------------------------------------------ |  | ------------------------------------------------------
|
|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                                    |                                                        |  |                                                       
|                                                              |                                                        |  |                                                       
|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 $4.2 million at September 30, 2003 compared with $4.3 million at December 31,
2002. Nonaccrual loans decreased $125,000 from $2.8 million at December 31, 2002 to $2.7
million at September 30, 2003. This decrease is due primarily to several smaller loans
being removed from non-accrual status. Accruing loans 90 or more days past due increased
$255,000, from $404,000 at December 31, 2002 to $659,000 at September 30, 2003. This
increase is due primarily to general economic conditions being less favorable than
expected. Other real estate decreased $301,000 during the same comparative period. The
decrease in other real estate is primarily the result of loans that were foreclosed on
during the period totaling $1.0 million, net of sales of properties with a carrying value
of $1.3 million. Management anticipates minimal losses on the total of these nonperforming
assets. The Company had no restructured loans at September 30, 2003 or at December 31,
2002.


The
ratio of nonperforming assets to total loans and other real estate was 1.16% and 1.18% at
September 30, 2003 and December 31, 2002, respectively.



21
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                        | September 30,
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 $107.2 million at September 30, 2003, an increase of $227,000 or 0.21% from $107.0
million at December 31, 2002. At September 30, 2003, securities represented 20.4% of total
assets compared with 20.7% of total assets at December 31, 2002. The average yield on
securities for the nine months ended September 30, 2003 was 3.58% compared with 5.37% for
the same period in 2002. At September 30, 2003, securities included $10.1 million in U.S.
Government securities, $92.0 million in mortgage-backed securities $3.8 million in equity
securities, and $1.3 million in municipal securities. The average life of the securities
portfolio at September 30, 2003, is approximately 2.64 years, however, all of the
Companys securities are classified as available-for-sale.


Other Assets


Other
assets totaled $9.6 million at September 30, 2003 compared to $9.3 million at December 31,
2002, an increase of $344,000 or 3.7%. This increase resulted primarily from the recording
of additional cash value on key-man life insurance that the Company owns.


Deposits


At
September 30, 2003, demand, money market and savings deposits account for approximately
48.0% of total deposits, while certificates of deposit made up 52.0% of total deposits.
Total deposits decreased $4.2 million or 1.0% from December 31, 2002 to September 30,
2003. This decrease comes primarily from a decrease in certificate of deposits of $22.0
million or 9.1%, partially offset by an increase in interest-bearing demand deposits of
$11.6 million or 10.1%. Noninterest-bearing demand deposits totaled $74.6 million or 17.7%
of total deposits at September 30, 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, was 1.81% for the nine months ended September 30, 2003 compared with
2.54% 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.


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 nine months of 2003 were
securities purchases of $93.8 million, security calls, maturities, and principal
repayments of $47.3 million, securities sales of $43.4 million, and the net increase in
FHLB advances of $10.5 million.



22
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Off Balance Sheet Items


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. In the event the customer does not perform in accordance with the terms
of the agreement with the third party, the Company would be required to fund the
commitment. The maximum potential amount of future payments the Company could be required
to make is represented by the contractual amount shown in the table below. If the
commitment is funded, the Company would be entitled to seek recovery from the customer. As
of September 30, 2003 and December 31, 2002, no amounts have been recorded as liabilities
for the Banks potential obligations under these guarantees.


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

|                             | Contract or
Notional Amount
|---------------------------- | ---------------------------
|
|
|Commitments to extend credit |                            
|Letters of credit            |                            

|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
September 30, 2003, the Companys Tier 1 risk-based capital, total risk-based capital
and leverage capital ratios are 12.10%, 13.18%, and 8.17%, respectively. As of September
30, 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 11.66%,
12.74%, and 7.88%, respectively.


Recent accounting
pronouncements


In
January 2003, the Financial Accounting Standards Board (FASB) issue Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, which establishes criteria to
identify and assess a companys interest in variable interest entities and for
consolidating those entities. FIN 46 is currently effective for variable interest entities
created or obtained after January 2003, and will be effective for all variable interest
entities for periods beginning after December 15, 2003. The adoption of FIN 46 is not
expected to require the consolidation by the Company of any additional entities.



23
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No.
150), Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. It
is to be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Adoption of SFAS No.
150 on July 1, 2003 did not have a material effect on the Companys consolidated
financial statements.


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.


As
of the end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive officer and
principal financial officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based
on this evaluation, the principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported to the
Companys management within the time periods specified in Securities and Exchange
Commission rules and forms.


(b)       Changes
in internal control over financial reporting


There
were no significant changes in the Companys internal control over financial
reporting that occurred during the Companys most recent fiscal quarter that have
materially affected., or are reasonably likely to materially affect, the Companys
internal control over financial reporting.


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 operations.


ITEM 2. CHANGES IN
SECURITIES AND USE OF PROCEEDS


None



24
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 10-Q:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Exhibit Number | Description of Exhibit                                                                                                                                                                
| | -------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1           | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 31.2           | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 32.1           | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   
| | 32.2           | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   

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

| | The
Company filed a Current Report on Form 8-K under Item 7 and Item 12 of Form 8-K on August
8, 2003 to announce the release of the Companys earnings for the second quarter
2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--

|SIGNATURE


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:    November 13, 2003 |  | GUARANTY BANCSHARES, INC.
(Registrant)By: /s/ Arthur B. Scharlach, Jr.
Arthur B. Scharlach, Jr.
President & Chief Executive Officer
(Principal Executive Officer)
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date:    November 13, 2003 |  | By: /s/ Clifton A. Payne
Clifton A. Payne
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
|-------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|26
|--

|Index to Exhibits
|-----------------

| | Exhibit Number | Description of Exhibit                                                                                                                                                                
| | -------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1           | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 31.2           | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 32.1           | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   
| | 32.2           | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   

|27
|--